How to Avoid Becoming a Day Trader

It's fine to be a day trader if you choose but dangerous to become one by accident.

Beware of becoming an "Accidental Day Trader" -- an investor that becomes a day trader without actually intending to be one. Becoming a day trader is easier than you think; you might start innocently enough by trading stocks once a month. Then, it becomes once a week. Soon you're checking your stock portfolio every day and before long, you are trading multiple times a day, trying to capitalize on the market's minor ups and downs.



A day trader doesn't need a certificate and does not report to an office. There's no magical threshold of trading that you cross to fall into the category of a day trader. It can happen to anyone who spends too much time watching the hour-by-hour or minute-by-minute machinations of the stock market.

Instructions

1. Write down a limit to the number of trades you will place in a single day, week or month. Keep this memo posted near your computer.

2. Avoid checking your portfolio balance more than once a week. Checking your balance frequently encourages you to trade.

3. Avoid reading or watching financial news. This also could encourage you to trade frequently.

4. Read books and blogs that extol the virtue of passive investing. Passive investing is the opposite of day trading -- this investing philosophy that assumes the fees and taxes you incur when trading frequently, over time, will deplete the value of any gains you made by frequent trading. The passive investing philosophy also holds that it is not possible to "time" the market, and frequent trading could cause you to miss out on some of the market's best days. Refer to the Resources section for some examples.

5. Move your accounts to brokerage firms with a written policy that discourages its clients from "timing" the market -- which is exactly what day trading aims to do. Vanguard and Charles Schwab are institutions that advice investors against market timing.

6. Make regular contributions to your portfolio that automatically deduct from your paycheck each month. This way, your investing follows a hands-off approach without attempting any market timing.

7. Invest in exchange-traded funds (ETFs) or index funds rather than individual stocks. ETFs and Index Funds are designed to be long-term, passive investments.

8. Keep a spreadsheet of how much money you've paid in trading fees and commissions. Watch that number grow and refer to it when you feel tempted to day trade.

Tips & Warnings

• All investing carries risk, including risk of principal loss. Consult with a financial advisor or tax professional for long-term financial advice.

Resources

• "The Only Guide to a Winning Investment Strategy You'll Ever Need"; Larry Swedroe; 2005
• "The Bogleheads' Guide to Investing"; Taylor Larimore, Mel Lindauer and Michael LeBouef; 2006
• "The Power of Passive Investing"; Richard Ferri; 2010