Day Trading refers to the buying and selling of assets on the same day. Asset types that are often Day Traded include stocks, currencies, and commodities. Often these day trades happen online, on the basis of small, short-term price fluctuations.

In this article, I’m going to teach you a strategy for beating 95% of all day traders and then I’m going to tackle the question of whether Day Trading is gambling?

How to beat 95% of Day Traders

When you Day Trade, the goal, generally, is to buy low and sell high.

I won’t go into some of the more exotic options because you don’t need to know them in order to follow my proven system.

In order to buy low and sell high all you need to do is predict the immediate future.

To predict the immediate future, all you need to do is accurately predict a few factors that affect asset prices in the near term such as: the news, the weather, consumer sentiment, upcoming tweets, monetary policy announcements, fiscal policy announcements, trade war developments, interest rate changes, how people feel, average temperatures, and the moods of traders to name just a few of these factors.

Needless to say, getting started Day Trading is super easy.

Start with a daily chart of whatever it is you want to Day Trade in. The chart doesn’t have to be connected to the internet or updated in real-time. In fact, the chart doesn’t even have to have anything to do with the thing you’re trading in.

You see, no chart of daily prices has any predictive capacity of the future (believing this would be silly), nonetheless, you need a chart in order to make you feel like you’re engaged in an academic exercise when you’re Day Trading as opposed to a foolish one.

Once you’ve chosen a chart, study this chart. Get intimately familiar with this chart. Read the news. Listen to podcasts. Study monetary and fiscal policy. Formulate a thesis. Come up with a system. That’s how you can distinguish pros from the average joe’s; the pros always have a system. Once you have a system back-test your system against historical results.

Once you’ve done all this, I want you to budget how much money you want to Day Trade with. Once you’ve set this budget, I want you to change this Day Trading budget to zero, decide not to Day trade and invest for the long-term instead. 

Now you may be feeling cheated right about now as I previously promised to show you a Day Trading system that has beat 95% of all day traders.

In fact, that’s exactly what I did.

Research from the Taiwanese Stock Exchange related to the performance of day traders over a 15 year period from 1992-2006 concludes that less than 1% of the total population of day traders is able to predictably and reliably earn positive abnormal returns net of fees. (1)

“Abnormal returns” refers to returns that cannot be explained by general movements of the stock market.

So I could have said my system has historically beaten 99% of day traders but I went with 95% of day traders just to be on the conservative side. 

If you choose to follow my proven system, congratulations you’ve just saved yourself a lot of time, money and heartache, you’re welcome.

On a serious note, a very good book about forecasting is “The Black Swan” by Nassim Talib, if you like listening while you’re running or in the car, as I do, you can listen to The Black Swan for free with a 30-day trial of Audible. Audible is a service I’ve used for quite a while now to listen to books. They’re currently offering free 30-day trials that come with 2 free audiobooks.

Anyway, back to day trading…

Some of you may not be as persuaded by the odds as I am. You may be thinking: I know the risks, but I still think I can beat the odds or you might simply not care if you lose some money, and are only interested in whether Day Trading is gambling or not, that is, is it Halal (permissible in Islam) or Haram (prohibited in Islam).

Well, let’s talk about this:

Day Trading: Is it Maisir (Gambling)?

In a previous article I explained that Maisir is an activity where the following two criteria hold true:

  1. No prospects for producing needed value exist (here value is referring to usefulness)
  2. The participant risks their wealth in hopes of material gain.

Does Day Trading produce any needed value?

To me, the answer is plainly no.

Day trading doesn’t lead to the efficient allocation of society’s capital like long term investing does. It’s simply attempts to profit off of random short-term price fluctuations.

Don’t tell me you’re going to use the money you earn to help others because first off you’re not going to earn any money, your net loss of money over time is a near mathematical certainty. Second, if this argument were valid, it could be used to justify any prohibited activity whether it’s gambling, selling alcohol or lending with interest. i.e. I’m doing fill in this blank with a prohibited activity so I can help others with the money I earn.

You may tell yourself that you’re producing needed value by adding liquidity to the market but I’m fairly certain that markets will be completely fine if you stopped day trading. In fact, I contend that if all day traders stopped day trading the markets would still be totally fine.

What’s the big value loss to markets and the economy if a buy or sell order doesn’t execute instantaneously, and takes a minute or two to execute instead?

As for the second criteria for identifying Maisir: are the participants risking their wealth in hopes of material gain?

Clearly, yes.

So both criteria of Maisir seem to be present in Day Trading and therefore I think I can make a rather strong argument for why Day Trading, in general, is a form of prohibited gambling (Maisir) in Islam.

Day Trading: is it always Haram?

I fully recognize that buying an asset in hopes that its price goes up after a period of time is not haram. Additionally, I know of no restrictions in either the Quran or Sunnah for how long one must hold an asset before they decide to sell it.

Accordingly, I’m not comfortable saying that all day trading is unequivocally Haram all of the time.

Here’s what I do feel comfortable saying:

Even if you’re able to convince yourself that Day Trading isn’t gambling, the question remains, how is your Day trading producing any value for anyone? How is it useful?

The prophet, peace be upon him, said:

Take advantage of five before five: Your youth before your old age, your health before your sickness, your wealth before your need, your free time before you are busy and your life before your death.

ِAl-AlBani in ” Sahih Al-Jami’ ” (1077)

If you’re spending your time Day Trading, you’re not just squandering your wealth, you’re squandering your health and your time and your youth and your life on something that isn’t really needed by society and accordingly, something that I don’t think is going to be much of an asset for you on the day of judgment.

So while I’m not going to tell you that from a technical perspective Day Trading is strictly haram in all cases, I don’t think dedicating yourself to such an activity is in line with the spirit of the Quran and Sunnah.

Takeaways

The two main points I want you to take from this article are:

  1. It is a near mathematical certainty that you will lose your money Day Trading.
  2. Day Trading is at least frowned upon from an Islamic ethics perspectives, if not outright prohibited.

Food for thought at least.

Sources:

(1) “The Cross-Section of Speculator Skill: Evidence from Taiwan” is a research paper by Barber, Lee, Liu, and Odean published on 14th February 2011 on the Social Science Research Network.