Why Graham Stephan is Wrong About Day Trading!
I learned a lot from Graham Stephan. I think he's a great YouTuber, real estate investor, real estate agent and stock market investor, but he's very wrong about day trading.
If you watch any of my Youtube videos, you probably know I'm a big fan of Graham Stephan. I mean if you’re building your financial wealth, learning about investing in real estate or the stock market, and enjoy someone nagging at you for spending $6 on a Starbucks coffee, of course you would like him.
It's funny because we both posted a video with Lamborghinis in it for April fools one year. Except he has baller friends and probably got the lambo for free, while I was the dumbass who paid $3-4K to rent it… for a youtube video. Hey, I have no regrets. It was the best $4K ever spent on comedy!
Overview
In one of Graham’s videos, he shared his early experience dabbling in day trading and the get rich quick scheme.
In today's article, I want to talk about why Graham Stephan is wrong about day trading, coming from the perspective of a full time day trader who's been trading in the US stock market for many years.
This article is meant to be constructive feedback on a beginner traders journey, one that I have most certainly gone through the same way many years ago. We’re gonna discuss what Graham did well on and the areas about day trading that he was wrong about and most importantly, how other beginner day traders can learn from his experience.
Discussion
In the video, Graham describes his first experience with the stock market when he was still in high school. Hey, that means Graham had an early start trying to make money in highschool. I didn't know anything about stocks or money in general in high school. I was too busy worrying about whether I should go to prom or not. Spoiler alert, I didn't go.
So while in high school, Graham said he saw an online marketing ad for one of the biggest penny stock gurus in the industry. That’s what introduced him to day trading in the stock market, and not just any stocks… we’re talking about these trashy turd penny stocks that you either love or hate with a passion.
I'm not going to drop names, but that was probably the exact same day trading marketing ad I saw many years ago, except I wasn’t in high school then. I was most likely stuck in traffic on the 405 Interstate in Los angeles. No joke, I lived and worked about a year and a little bit more in LA, and half of my time there was spent in the car.
Okay sorry for that little detail nobody asked about, but it's very interesting that we saw the exact same ad of “How to turn a small amount of money into millions day trading,” with them sitting on the beach, driving in those lambos, and banking on the toilet.
Coincidentally, many profitable traders I know today all share the same lure, the bait of promises that drew us to take the first step into this wild world of day trading. In a way, I need to thank these day trading marketers.
Beginner’s Luck
In the video, Graham says he had some initial success with these penny stock picks online and made some profits due to being lucky. You know what we say about luck in day trading; luck is not a consistently reliable strategy.
In fact, beginner's luck is often a very dangerous start for brand new traders. It's very common for people brand new to the market to think that this trading business is easy where all you have to do is buy low and sell high right? How hard can this day trading thing be?
It's easy to have the misconception that day trading is easy money and a get rich quick scheme,
especially with the glorified lifestyle marketing we see on a daily basis.
That's why beginners' luck could be extremely dangerous. Imagine if in your first few trades you made $100, $500 or $1,000 quick. If that worked for the first week for a brand new trader, who wouldn't want to double down and quadruple their share sizes by using max buying power on all their trades the next week?
Graham mentioned in the video that after the initial few successful trades due to beginners' luck, he just had a lot of bad trades. I'm not sure whether Graham actually followed penny stock chat room buy and sell alerts or if he just followed what people were recommending online on stock forums like stocktwits, but the key here is that he followed others into those trades.
He bought those stocks that he had no idea about, had no plan for where the good entries were, where the potential upside was, and where he should stop out if the trade worked against him.
That my friends is the biggest mistake you could make as a beginner day trader, following chat room alerts into a trade blindly to buy and sell. I know, because I made the exact same mistake too; Graham isn’t alone in making those mistakes. In fact, I hate to have to repeat myself again, but most day traders start out trading the stock market by following chat room alerts.
Besides sharing his personal experience with day trading, Graham also talks about a few key points why day traders lose money, and I do agree with most of them.
My Agreements
Graham says that most new traders are overly confident with their ability in the market which I agree is very true, especially when you get beginners' luck like we had talked about earlier.
Controlling emotions
He also talks about other reasons why most traders cannot succeed such as the inability to control their emotions, such as hope, greed, fear, regret. I cannot agree with this statement more. Most traders lose, not because they don't know how to trade, but because they don't know how to control their emotions. This is why a trader could be on a series of small wins, and when shit hits the fan one day, they become emotionally attached to a trade.
They ignore their own rule of risk management and decide to fight the trend by fighting the stock. That turns into hope and hold which turns into fear of taking a loss, and eventually that's how a small loss turns into a big unrecoverable loss that blows up a traders account. It's not difficult to make money in the market, but it is more difficult to keep it.
Making Risky Trades
Graham also mentions that most traders, especially when you are starting out with very little capital will be more likely to take riskier trades. This is very true. If you’re starting out with a very small amount of money like $500 or $1,000, you’ll be more likely to want to take trades that can double or 10x your account quickly, in order to justify the commission cost and the time spent in front of the market.
Small accounts traders are more likely to treat trading as a get rich quick scheme. They take risk management less seriously because they already have so little to begin with, so what can they really lose right?
That is the reason I recommend having at least $5,000 to start, and treat that as market tuition. $5,000 is an amount that is enough for most people to care about protecting, and at the same time, it's not big enough for the damage to ruin someone’s financial future since most new traders are likely to lose 50%, if not all of their accounts within the first 6 months to a year.
It's great if you have $50K or $100K or more to start trading, but please do yourself a huge favor; do not use all of that buying power when you’re learning.
I certainly blew up my first few $2K and $5K trading accounts. You have to be willing to pay market tuition in order to learn day trading. If you’re not willing to risk that market tuition, then day trading isn’t for you. It’s like college; if you don't want to pay a six figure tuition, then don't go.
My Disagreements
Ok, I wish I didn't go to college because I could have saved that six figures for my trading account instead, but the biggest issue I have with one of the reasons Graham mentioned as why 80% of all traders fail is… lack of diversification.
For those who are familiar with the term, diversification means allocating your capital into various sectors such as tech, retail, utilities, energy, and investing in various assets such as stocks, precious metals or real estate. The goal of doing this is so you can spread the risk while maximizing your potential profit across all areas. It’s essentially not putting all your eggs in one basket.
Diversification is very important, yes… if you were investing. I think Graham, being a long term stock market investor and real estate investor, really made the video analyzing day trading as a style of investing.
Like I mentioned in a recent article, day trading cannot be compared to investing. Day trading is a business. These stocks are trading vehicles, and we are just riding the intraday volatility rather than investing for long term appreciation in value.
In fact, I think it's great that while we are day trading intraday, we are not too diversified and have our capital too spread out. Us traders should only be taking trades and buying stocks that show us A+ set ups, whether the stock is setting up for an extended short or a red to green move for us to go long. It's great to not be diversified in your trading account, unless you are hedging your position. That's the big difference there.
The last thing you want to do in day trading is to be in way too many positions with none of them actually being real setups that are part of your plan. Remember, we don’t buy and hold for appreciation in value in trading; we are getting in and out of positions with price fluctuations.
Conclusion
Graham did something very well as a new trader in highschool. It sounded like he recognized really quickly that day trading is NOT a get rich quick scheme. He recognized his earlier wins were just beginner's luck, and he simply didn’t have the time nor the desire to continue on this journey to learn day trading the proper way.
I think it is a very realistic depiction and a positive ending for most new traders. Yes, he did lose most of his first trading account, but thankfully he was only in high school meaning he probably started with a small account. His max loss was probably $2K. When I was in high school, I never saw my bank account break 4 digits, so I think it's a reasonable guess.
I think it's great that he realized that day trading is not the kind of business for him, and didn't overstay to try to revenge trade the losses back all the while treating day trading as gambling, which unfortunately is something many new traders tend to do.
Again, I’m certainly not saying day trading is better than investing or the other way around; I’m just here to make it clear that the former is a job and a business that requires learned skills from hundreds of thousands of hours of screen time, while the later is something you can casually hold on to, stress free over a long period of time. You can also do both at the same time, like I do.
