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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode: Get an inside look into strategies and pitfalls of the high-risk, high-reward world of day trading.

Hosts Sean Pyles and Andy Rosen discuss the high-stakes world of day trading and shed some light on your statistical chances of finding success. Then, Andy welcomes seasoned traders Sierra Smith and Michael Sincere to the podcast to share their perspectives. They pull back the curtain on Sierra’s typical trading morning, break down concepts like options trading and highlight the rollercoaster ride of market highs and lows.

They also discuss the profound role of social media in day trading, the importance of discipline and emotional control and the potential pitfalls and real challenges in day trading. Drawing from their personal experiences, they shed light on how they’ve learned to take profits quickly, prevent losses from spiraling and maintain a realistic perspective on potential returns.

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Sean Pyles: There was a time back, oh, about 30 years ago when headlines were filled with stories about people using newfangled technology to trade stocks minute by minute from the comfort of their couches. Today, you can trade almost second by second, but that doesn’t mean it’s a good idea.

Sierra Smith: In the beginning it’s definitely not all sunshine and rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making. Especially when you’re doing day trading with options, it’s very volatile, so it’s very much high risk, high reward.

Sean Pyles: Welcome to NerdWallet’s Smart Money Podcast. I’m Sean Pyles.

Andy Rosen: And I’m Andy Newfangled Rosen.

Sean Pyles: Today we have episode two of our Nerdy Deep Dive into next level investing. And Andy, let’s just start out with the caution we mentioned last episode, which is that here on Smart Money, we still think the vast majority of people will have more success with very basic investing strategies, like using the buy-and-hold strategy, investing for the long-term, utilizing low cost, lower risk index funds, seeking out safe returns like high yield savings accounts.

Andy Rosen: You’ll get no arguing from me on that, Sean. But as we noted last time, some people do want to do more on the markets. Maybe they have some playing around money, maybe their risk tolerance is higher than the average bear, or bull. Maybe they’re just curious about all these terms that they hear on the nightly news. Does anyone watch the nightly news anymore?

Sean Pyles: Nope.

Andy Rosen: Yeah, and as we also noted, it’s good to be educated about the different ways investors use the stock market and other markets, because all of it has an impact on the overall economy, which affects everybody.

Sean Pyles: Right. Well, frankly, when I hear the phrase day trading, I just think the odds are really against people. There’s research showing that only about 1% of day traders consistently make money, and some kinds of day trading, like trading options, you can actually lose more money than you put up. If you don’t know what you’re doing or your expectations are not aligned with the reality of what you’re doing, you can get into a desperate situation pretty quickly.

Andy Rosen: It is absolutely true that people can get over their heads quickly, and there are a lot of people on social media that make day trading seem like it’s easier or more profitable than it actually is. Think of it this way, if you were losing a lot of money day trading, do you think you’d go on TikTok and brag about it? I doubt it, right?

Sean Pyles: Probably not.

Andy Rosen: Yeah. If people want to try this, they need to be aware of these percentages and aware of the risks and the time and effort that is involved. You really have to be watching moment to moment to see what’s happening. But the fact is that there are a lot of day traders out there and they do help move markets, so let’s hear from a couple of them to try to understand what they do and how it really works.

Sean Pyles: Let’s do it. But before we get to that, a reminder from the lovely folks on the NerdWallet legal team, we Nerds are not financial or investment advisors, we will not tell you what to do with your money. Everything in this episode and this series is to provide you, our dear listener, with the knowledge to make informed decisions with your own money.

And listener, we want to hear what you think, too. To share your thoughts around next-level investing with us, leave us a voicemail or text the Nerd Hotline at 901-730-6373. That’s 901-730-NERD, or email a voice memo to [email protected]. Andy, who are we hearing from today?

Andy Rosen: We’re hearing from two day traders, one former, one current. Sierra Smith is a trader and social media creator who runs a Discord server where she and other traders talk about strategy, trading concepts, etcetera. She’s based in Houston, and you can find her on TikTok or YouTube as well.

Michael Sincere is an author and speaker about investing topics. Among his books is “Understanding Options” and “Start Day Trading Now.” And he’s also a financial columnist for MarketWatch. He’s based in Miami.

Sean Pyles: Hey, Andy, before we go any further, let’s take a second to talk about what a Discord server is and what it means to run one. A lot of folks might not be familiar with this. You said Sierra does this, right?

Andy Rosen: Right. Without getting into too much detail, Discord is basically a chat service organized around a specific topic or interest group. And they’re particularly popular among video gamers, that’s where the service rose to popularity, but they’ve developed a big audience in the online investing world. Content creators like Sierra will often use Discord servers to connect with their audiences. If you haven’t used Discord, think of it as something like a mixture between Slack or Microsoft Teams with a little bit of Reddit mixed in.

Sean Pyles: OK, cool.

Andy Rosen: Sierra, Michael, welcome to Smart Money.

Sierra Smith: Thank you for having me.

Michael Sincere: Thanks for having me, too.

Andy Rosen: The first thing I want to know is, I guess I’ll start with Sierra, did you do any day trading today?

Sierra Smith: I actually did do some day trading today.

Andy Rosen: Tell me, just as an easy example to pull out of your head, what did you do? Just talk to me about what your morning went like.

Sierra Smith: This morning specifically I did live trading with my Discord server. We got on around 8:15, I marked up three different stocks for them, so that way they could have a variety to choose from if they chose to take some trades. I personally took Apple today, I traded Apple. I took calls, which essentially means that I believe the stock is going to go up, for those who don’t understand options terminology or anything.

Yeah, that’s what my morning was today, day trading. And then afterwards we just did some education. We did some trade recap for some people who didn’t win on their trade, we went over why they didn’t. Yeah, that was pretty much my early morning today.

Andy Rosen: And can you tell me what you saw in Apple this morning, in layman’s terms, that made you feel confident about making those short-term trades?

Sierra Smith: I think Apple was the price in the pre-market. There’s pre-market and post-market, and there’s actual market hours. Pre-market with options you cannot trade. But in the pre-market it was sitting within this demand zone, I believe. And so if it’s within a demand zone, that essentially means that the stock most likely will go up from there.

I just facilitate, I’m going to take Apple calls today, because it’s within that zone, which is the whole chart analysis that we did before the market opened. And so that way when the market actually opened, we were able to take that trade based off of that prior analysis.

Andy Rosen: And Michael, I know you’re not really doing day trading anymore. Tell me what your daily thinking about your portfolio looks like.

Michael Sincere: Right. What Sierra was doing was something I did do in the past, mostly when there was a volatile market. And I would jump on some of the hot stocks and ride it higher. And I stopped it because it’s wonderful when you’re on the right side, but if you’re not, it can turn around really quickly.

To answer your specific question, I switched from day trading to a more traditional buy index funds. And I sell covered calls, which is also an option strategy, but to me it’s a lot less risky than day trading.

Andy Rosen: Just for the people out there: When you sell a covered call, basically what you’re doing, if I’m understanding correctly, is you are selling an option for someone else to buy a stock that you already own. So if your trade doesn’t work out, you at least have the stock to back it up. You’re not going to have to buy a stock at a higher price than you might want to pay for it in order to sell it. Is that accurate?

Michael Sincere: It is, and I’ll give you an example. Let’s say I bought Apple, and then what I would do is I would rent out those shares to Sierra, who’s buying calls. I’m selling those calls to her, she’s buying them. I wouldn’t make as much money on it, but I do get an immediate income. And so what I do is I sell them to the speculators, and I’m like the landlord. I get my income and I just want my nice income and I don’t have to go through the stress of watching it all day long, every minute, can’t even go to the bathroom. That lifestyle I decided to walk away from. But by selling the covered calls, basically Sierra or another speculator, they basically own the rights to it, and they can sell it from me at any time. So I just wait a month or whatever timeline that I decide to sell those calls on.

Andy Rosen: Got it. Maybe you folks have met before, even without knowing.

Sierra Smith: Probably.

Michael Sincere: Absolutely. I hope you enjoyed those calls I made and bought today.

Sierra Smith: I did.

Michael Sincere: Thanks.

Andy Rosen: Let’s go back and hear a little bit about each of you with your origin stories. Maybe start with Sierra. How old were you when you started trading? What made you start? Tell me a little bit about how you got into it.

Sierra Smith: I started trading when I was 18 years old. After I had graduated high school, I had a friend, and he had posted on social media, he had bought his dream car at 18. And I’m like, what? We just graduated high school, so it doesn’t make sense for you to be buying your dream car at that age, or so I thought. And so I asked him, I was like, “What do you do? How did you buy that car?” And he told me that he traded options. And I’m like, hmm. I’ve never heard about options trading before, all I knew was I can buy a stock if I so wanted to.

And so he taught me how to trade options. And then from there I just started trading. I spent a lot of time looking at charts. I’ve just fallen in love with trading. I’ve just been trading, I would say I trade at least four out of five days of the week, even now.

And it’s just because now I think my shift with trading has focused from not trying to trade to survive and make a living and provide for myself, but now it’s just trading just to make some income. And just because I love trading, I really do love what I do. I’m really passionate about it. Because I think when people hear trading, they have a whole negative stigma around it. Or when it comes to financial stuff in general, people get leery. No matter what it is, whether it’s trading or investing or whether it’s buying something off the street, people get a little leery when it comes to putting their money in certain places. I just think being able to de-stigmatize trading as a whole is something that I love to be able to do.

Andy Rosen: You talk about how you love it. What makes you love it? And do you love it every day? There can’t be all sunshine and rainbows, can it?

Sierra Smith: In the beginning, it’s definitely not all sunshine or rainbows. When you make mistakes in trading, those are very expensive mistakes that you are making. Especially when you’re doing day trading with options, it’s very volatile, especially the way that I trade. So it’s very much high risk, high reward.

Obviously, the days that I win, I’m having a great day. I love it then. But obviously those losing days are really hard. After you get more comfortable trading, you realize how to take losses with a grain of salt. Those larger losses, those hurt. But when it comes to options trading, you just have to build up a sort of mental fortitude, especially if you trade the way that I do. While I do agree, there are definitely less riskier ways to trade, that’s just how I personally do it. Because like I said, I’m 20 and I like to make risks. It works for me.

Andy Rosen: Got it. I’m 39 and I use a robo-advisor.

Michael, I know you’ve done a lot of research and writing about various aspects of navigating the financial world, but you’ve done some specific research into the world of day trading. I was wondering if you could give a really quick Cliff’s Notes about how this became a normal part of the financial world. It wasn’t too long ago that regular people could not just log onto their computer and trade stocks on their own. You would’ve had to go through a lot more hoops than you can do now. Can you talk just a little bit about the history and maybe you can segue into how you became acquainted with it?

Michael Sincere: Well, the history goes back to the ’90s, when I was beginning as well. All of a sudden I discovered trading. And I think it started with Netscape, which I think went up an unbelievable amount of money in one day because of something called the internet, which was suddenly discovered. Before, if you were day trading or any kind of trading, it would cost you as much as $100 per trade. And once the internet came and these companies started switching to online trading, it went from $100 per trade to maybe $20 a trade. And as you know, now it’s pretty much free. But that’s when I got involved.

And in the ’90s, the day trading was unbelievable. It seemed like any stock you bought related to internet, you could make $20,000, $30,000 a day. And that’s when it really got really popular. Unfortunately, it all came to a screeching halt when the market, I think it was around 2000, when it all crashed. And all the day traders started losing money. All their money.

I was on these websites and I saw them just panicked as they … I’m trying to think of some of the stocks they bought, but many blew up, like Pets.com and all these others. And people got sick of day trading for many years. The majority did.

And then now it’s made a resurgence again, or at least it did over the last few years. And so Sierra, what she’s doing is it’s, as she said, high risk, high reward. It’s intense. You have to sit, be in front of the computer all the time. And day trading options is even more speculative. And I wrote books on options and on day trading. But when you combine day trading with options, the way options work, they can switch in a minute. You could be up and then the next minute you could be down. I have a lot of respect for anyone who can book a profit.

For me, I was trying all types of trading and decided to write books about it. Because I made so many mistakes, lost so much money at first, and so I was trying to help other people. And that’s when I both wrote books on day trading and options. I think I wrote about eight books on both.

Andy Rosen: I did want to ask, both of you in different ways have made part of your living out of talking about trading, and talking about the financial world with people. And I think this is true of a lot of people who get into this world. There is this content aspect to it. Tell me why you think the public-facing aspect of it seems to be important to a lot of traders, from the influencers to the authors.

Sierra Smith: I know from my experience, I can say I recently started utilizing social media to talk about trading. And so I had made a TikTok about it online, and it blew up and it went viral. And so many people were like, “Oh, I’m super interested in trading, and I would love to learn.” And for the first time in two years I was like, you know what? Maybe I will start teaching. Because I’ve never wanted to teach people about trading. I just would do it by myself and go on about my day. But I think when it comes to the social media aspect of trading, I think people have to see that it works for other people. They have to see how it works, why it works, in order to want to get into it. Because everybody knows you can buy and sell stocks, but no one really knows how profitable it could be or what that looks like on a day-to-day basis. I think the social media projection of it really helps bring people into the trading industry, if you want to call it that.

Sean Pyles: I saw on one of your — I think it was a TikTok video that you made — I saw you talking about how there’s a lot of people on social media that will tell you, “Oh, I did these three trades that I made this amount of money,” and you were warning people it’s not that simple.

Sierra Smith: Yeah.

Sean Pyles: What do you think are some of the pitfalls of social media based investing?

Sierra Smith: I think one of the pitfalls of it is everybody wants to make trading seem like it’s perfect. And then people always want to post what they’ve made in their profits, but they won’t talk about their losses or they won’t talk about what they put in.

I know as far as options goes, it’s a lot about percentage. That’s how I see it. For example, if I tell you guys that I’ve made $10,000 in a day, it’s not because I turned $10 into $10,000. It’s usually because, OK, I made a put at 40, it made 25% on that trade.

I think the pitfall, the major pitfall when it comes to trading and social media, is that people don’t advertise the entirety of what it is. And a lot of people end up getting into trading thinking that they’re going to turn $50 into $5,000 in two days, and that’s just not realistic.

Andy Rosen: Michael, obviously you’re maybe not as active on social, but you’ve done quite a lot of content around these kinds of activities. What’s your perspective on it?

Michael Sincere: Well, first of all, by writing these books I was able to speak to some of the best traders and investors in the world, like Peter Lynch, Mark D. Cook, who passed away. But Mark D. Cook was one of the top option traders in the world, and was successful for many, many years. I used to interview him all the time and he became a friend, so I learned a lot from him. And it took him five years to become successful. It was very difficult those first five years, and he wanted to give up many times trading options. But then he found his system.

And what I learned from him, and my own experience, is it’s really the emotion that gets everybody. It’s really the discipline and emotion. Everyone talks about the discipline, but they don’t really know what it means until they start trading. And what I mean is you’re in a losing trade and you’re ready to lose $10,000. And you have to figure out very quickly whether you close the trade, whether you add more to it, whether you hold, and these are lightning-fast decisions that really hurt a lot of people.

I’m sure Sierra’s gone through this many times. I’ve found from my experience, it’s very difficult. Beginners have high expectations about how easy it is to make money, as Sierra said. But it does take a long time to find your own style. And trading’s not for everybody, too.

And some of the pitfalls I’ve found is, one, a lot of people turn from trading to gambling. It’s very easy to do. You think you’re trading, you’re following everything, but you’re betting way too much money on a trade. Which means, yes, you can make $100,000, but you also could lose that exact same amount if you’re not careful. Which is why I tell people the number one rule is to trade small, especially when you’re beginning. Do not try to make $100,000 in one day, try to make a few hundred. If you can do that consistently over a long period of time, then you may have a shot at it. But if you come in there trying to make big, big bucks, nine out of 10 are going to blow up their account, in my opinion.

Sierra Smith: Yeah, I’m definitely seeing more people fail than succeed when it comes to starting out in trading, and that’s just because so many people think trading is going to be so easy. A lot of people don’t exercise proper risk management, which is something that anybody that’s been trading for a while will tell you to exercise.

Or the way somebody with a larger account size trades is entirely different in the way somebody with a smaller account size trades. For me, I have a larger account size, so I can put tens of thousands of dollars into a trade and be OK with it with the way that I trade. But the strategy that I use may not work for somebody who only has $500 in their account. And so I think a lot of people just assume that you can just make all this money overnight, and they end up just getting so discouraged beyond trading. Which sucks, because trading for me obviously has changed my life, and I think there’s so many good and positives to it, but I just don’t think people are really fully educated on what trading really is.

Andy Rosen: I do want to get back to some things that might help those beginner level people who just know this term and want to get a sense of it. Michael, if you would be willing, could you just tell us a little bit more about how you moved off of day trading? You talked a little bit just about the lifestyle and why it didn’t work for you, but just a little more detail on how your views evolved would be awesome.

Michael Sincere: I kept coming back to the fact that the strategy that worked again and again — and I used to have long conversations with John Bogle as well, who was the father of indexing — and I found out that over and over I was making more money on a longer-term basis just by buying and holding these index funds. At the same time, I was trying to make fast money using the strategies Sierra’s using, like momentum trading. And I actually did do option trading with momentum. I found it extremely stressful. I found out I had to devote entire days to it. I tried to get out by noon. That was my goal each day, get in at the open, ride it and then get out. And yes, on the good days, I’d make pretty good money. I’d make $10,000 on good days. Once I made $30,000 and I was riding high. Three days later, I believe, I lost it all.

I found out after about a year of this, it was not for me. You have to know your own personality. And I found, for my personality, I couldn’t take the stress of it every day. And so I pretty much stopped day trading, and I wrote books on helping people manage the risk part of it. Anyone can learn about the technical aspects of it, like the charting and the indicators, but it’s the emotions that are the difficult part to manage. That’s what really ruins most people. I emotionally did not have what it takes to be a professional day trader, especially a momentum trader. And I saw that it was easy to blow up my account. And some days I’d blow up that day or that week, and I got out of it.

Andy Rosen: Sierra, it must also take nerves of steel to stop after a couple minutes. If you’re doing well, it’s probably tempting to say, oh, I could get more. Right? It seems like one of the things you’re describing is managing that and knowing when to stop. I would love to hear either one of you talk about when to stop. When it’s time to stop, whether you’re having a good day or a bad day. When it’s prudent to take a deep breath.

Sierra Smith: One thing I always tell my students is that when it comes to day trading, green is green. It doesn’t matter if you made $500 or $5. Because I promise if you saw $5 on the ground, you would pick it up. I think I have lost so much money in the markets just holding out on trades and just like, hey, you know what? It’s going up. I could hold this out for five more minutes, 10 more minutes, and then it ends up reversing back down against my trend. And the minute that I see I’m in profit enough that I’m happy with, I will end my trade. And I think the reason why I trade like that, again, is because I’m at a point where it’s not like I’m trading trying to compound my account and secure my lifestyle.

That’s all said and done now. I feel like now my trade’s very relaxed. It’s just get in, get out, make something for today, and then go on about my day. That’s why I’m OK with just being in trades for a few minutes. Sometimes I will exit a trade and then the stock will run three more dollars and I’m like, man, I could have made so much money. But as long as I left with something, I’m good.

Andy Rosen: And what about on a bad day? There’s got to be a temptation to chase a loss to try to get it back. How do you manage that?

Sierra Smith: I have trading rules, actually. I have personal rules for me when it comes to trading. If I take a loss, I’m just going to be done for the day. Honestly, I could have a risk or a probability of being able to make that back, but I would rather take one loss than take two losses or three losses trying to keep revenge trading and get that back. Lost a lot of money doing that also. I’ll no longer be doing that when it comes to trading. I just think when you take a loss, you have to make sure that you don’t let your losses lose that battle, if that makes sense. Obviously you have to have a stop loss and proper risk management, so that way it’s not like when you do lose, you’re losing your entire account size every single time.

Andy Rosen: Tell me, if there are listeners out there who are thinking, this sounds fun, this is something I might be interested in, I would like to try it out, where do you recommend people start? What’s the first step someone should take? Thinking of someone who might not even have a brokerage account and just wants to figure out if day trading is something they could ever do.

Sierra Smith: I think people who want to start, should start with not by learning anything about brokerage accounts or charting or anything, I think they just need to learn what trading is and what trading is not. Because I know a lot of people want to start when they hear how much money that people have made, but they have to understand what trading is. What trading really is and what it isn’t.

And then after that, I say people need to start with just looking at charts and just seeing if they can find some that make sense to them. And the biggest thing that helped me learn how to trade was having somebody who walked through it with me. Because you have to know what type of learner you are. Some people can read books on options training and learn. Some people watch videos, some people need one-on-ones with people. So just figuring out how you learn and using that and applying that to the trading world.

Andy Rosen: Michael, what do you think?

Michael Sincere: I think that people should, again, as I said, start small. I think if they know nothing about the market at all, they should start with opening up an account, starting with index funds or mutual funds. Start at that level. They really need to understand the stock market first. If you want to become a day trader of stocks, do a small amount, open up. But you have to start with the brokerage account, you have to learn the different aspects. And that means learning about the indicators and learning there’s a lot to the market that a lot of people don’t know.

Now, eventually, if you want to trade options, you should first start by learning the different aspects of options. There are great books on trading and on investing with options. But again, there’s no rush. If you’re coming in trying to make big money fast, that may not turn out so well. Basically, become a student of the market.

Andy Rosen: Both of you. Thank you so much for coming onto the show and telling us about your perspectives. Thank you so much.

Michael Sincere: Thank you.

Sierra Smith: You are so welcome. Thanks for having me.

Sean Pyles: Hey, Andy, I’ve got to tell you, I am pretty torn after hearing that conversation. Sierra seems to be living a super cool and successful life at such a young age. And there’s part of me that wants that, but there’s another much more rational part of me that knows that it’s just not realistic.

You hear about all the money she’s made, and it can be easy to forget that the vast majority of day traders lose money. I really view Sierra’s narrative as a cautionary tale, maybe, for her followers online more than for Sierra herself, because people might view her TikToks or courses, or those of another day trader, and think that this is a secret path to instant wealth, but it’s really not. Again, in all likelihood, you’re going to lose money if you do what Sierra does.

Andy Rosen: Sean, I think I have to agree. Obviously, Sierra does seem to be living a super cool life. She seems to be having a really good time, and that’s her life. And a lot of people have tried this and had very different results. And so, yeah, you might wind up like her and you might envy her, but on the other hand, you could wind up like the majority of traders and not get the kind of results you’re looking for, or wind up losing something that’s important to you.

You may be able to improve your chances by doing very scrupulous research, paying really close attention to your investments and how they’re performing moment to moment. But on the other hand, your research may lead you, as it seems to have done Sean, to the conclusion that this investing style isn’t for you. Maybe you don’t even have the time for it. And many people spend hours doing this every day and still lose money. As we said before, those are not the people you tend to see promoting their trade as much as the winners do.

Sean Pyles: No, and that’s why at the end of the day I know that I’m much more of a Michael than a Sierra. I love to do some research and have a solid understanding of what I’m going to be doing with my investment strategy. Plus, like Michael, I do not have the emotional fortitude to weather the big ups and downs that Sierra experiences on a daily or hourly basis.

All right, well Andy, how about a preview of what’s coming up in episode three of this series? Are we going to Vegas?

Andy Rosen: Well, some people would say we are, because we’re talking about options trading, short selling, derivatives, and contracts, all of which can have huge upsides and huge downsides. But they’re also very important in the market, so it’s worth hearing how they work, who might want to include them as part of a diversified portfolio, and how to know when it’s time to leave it to the pros.

Sam Taube: The risk and reward tends to be a lot higher than with just stock ownership. Because generally, with derivatives trading, you’re either going to get a big payout, double your money or something like that, or you’re going to lose everything you invested in a particular contract.

Sean Pyles: For now, that is all we have for this episode. If you have a money question of your own about investing or anything else, turn to the Nerds and call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.

Andy Rosen: This episode was produced by Tess Vigeland and me, Andy Rosen. Sean and Liz Weston helped with editing. Chris Davis helped with the fact-checking. Kaely Monahan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help.