Many years ago, the only people who could engage in active stock market trading were those employed by big financial institutions, brokerages, and trading houses. The playing field, or should we say trading field, has been levelled over the past 25 years thanks to advancements like the expansion of cheap brokerages and internet trading, as well as the instantaneous broadcast of news around the world and extremely low commissions. Retail investors may now attempt to trade like professionals more easily than ever thanks to the rise of trading platforms like Robinhood and 0% commissions in recent years.
Day trading has the potential to be a successful career (as long as you do it properly). However, it can also be a little difficult for beginners, especially those who don’t have a solid plan of attack. Even the most experienced day traders might run into trouble and lose money.
What is day trading actually, and how does it operate?
Takeaways
- Day traders use a wide range of approaches and strategies to take advantage of alleged market inefficiencies.
- Day traders are active traders that implement intraday strategies to profit from changes in an asset’s price.
- Technical analysis is frequently used to describe day trading, which calls for a lot of self-control and objectivity.
Day Trading Principles
The act of buying and selling a security during a single trading day is referred to as day trading. Although it can happen anywhere, the stock and foreign exchange (forex) markets are where it happens most frequently. Day traders are frequently well-educated and financially stable. To profit from minor price changes that occur in highly liquid equities or currencies, they employ high levels of leverage and short-term trading tactics.
Day traders are tuned into the things that trigger quick changes in the market. A common strategy is trading in response to reports. Economic statistics, business profits, and interest rates are examples of scheduled releases that are influenced by price movements and expectations. When those expectations are not realized or are surpassed, the markets typically respond with swift, large changes that are very advantageous for day traders.
Day traders employ a variety of intraday strategies. These strategies consist of:
• Scalping: Using several tiny profits on minute price swings throughout the day is the goal of this method.
• Range trading: With this approach, buy and sell choices are generally based on support and resistance levels.
• News-based trading: This tactic frequently takes advantage of trading chances created by the increased volatility surrounding news events.
• High-frequency trading (HFT): These tactics rely on complex algorithms to take advantage of minute or transient market imperfections.
A Controversial Method
On Wall Street, there is frequently discussion about the profit potential of day trading. Scams involving day trading on the internet have attracted novices by promising huge returns quickly. Sadly, the notion that this type of trading is some sort of quick-money scheme still exists. Some people day trade without having the necessary skills. However, some day traders are successful either in spite of the risks or possibly precisely because of them.
Day trading is avoided by many seasoned money managers and financial consultants. They contend that the gain typically does not outweigh the risk. On the other hand, many who engage in day trading maintain that profits can be made. Profitable day trading is feasible, but the success rate is inevitably lower because the activity is dangerous and skill-intensive. Furthermore, according to both economists and financial professionals, active trading tactics frequently outperform a simpler passive index strategy over lengthy periods of time, particularly when fees and taxes are factored in.
Day trading has significant risks and is not for everyone. Additionally, it necessitates a thorough comprehension of how markets function as well as a variety of short-term profit-generating techniques. Even though the media frequently focuses on the success tales of day traders who become extremely wealthy, keep in mind that this is not the situation for the majority of day traders: many will fail, and many more will struggle to survive. Furthermore, even while expertise is undoubtedly a factor, don’t undervalue the importance of luck and excellent timing. Even the most seasoned day trader can lose everything with a single stroke of bad luck.
Basic Characteristics of a Day Trader
Professional day traders, or people who trade as a profession rather than a pastime, are frequently seasoned experts in their industry. They frequently also possess extensive commercial expertise. Here are some requirements for becoming a successful day trader.
Understanding and practical experience in the market
Without knowledge of market fundamentals, day traders frequently lose money. Both technical analysis and interpreting charts are useful abilities for day traders. Charts, however, could be misleading if you don’t have a thorough understanding of the market and its particular hazards. Do your research and learn all there is to know about the things you trade.
Sufficient capital
Only risk capital that can be afforded to lose is used by day traders. In addition to saving them from financial disaster, this also helps traders trade without emotion. To take advantage of intraday market changes efficiently, a sizable amount of capital is frequently required. Being able to access enough funds is crucial since most day trading involves using a lot of leverage in margin accounts, and erratic market fluctuations can abruptly produce large margin calls.
Strategy
A trader needs an advantage over the competition. Swing trading, arbitrage, and trading the news are just a few of the many tactics employed by day traders. They hone these tactics until they reliably generate gains and successfully mitigate losses.
Discipline
Without discipline, a profitable approach is pointless. Due to their inability to execute trades that satisfy their own criteria, many day traders wind up losing money. Plan the trade and trade the plan as the saying goes. Without discipline, success is impossible. Day traders heavily rely on market volatility to make money. If a stock moves significantly during the day, a day trader might find it appealing. That might occur due to a variety of factors, such as an earnings report, investor sentiment, or even general business or economic news.
Day traders also choose highly liquid equities since they can adjust their positions without affecting the stock’s price when they do so. Investors may decide to acquire a stock if the price rises. A trader may elect to sell short if the price drops lower in order to profit from the price decline.
Whatever method a day trader employs, they typically seek to trade a stock that moves (a lot).
Day Trading Risks
Because of all the dangers involved, day trading might be intimidating for the typical investor. The following is a list of the hazards of day trading as highlighted by the U.S. Securities and Exchange Commission (SEC):
- Be prepared to experience severe financial losses: Day traders should only risk money that they can afford to lose because they frequently experience significant losses in their initial months of trading and many of them never advance to making profits.
- Day trading is a very demanding and expensive full-time job: It takes a lot of attention to recognize market patterns while monitoring hundreds of ticker quotes and price swings. Day traders also have substantial out-of-pocket costs, generally shelling out a lot of money to their employers for commissions, education, and technology.
- Day-trading strategies use the leverage of borrowed money to earn profits, which is why many day traders not only lose all of their money but also wind up in debt.
- Don’t buy into promises of quick riches: Be wary of “hot ideas” and “expert advice” from websites and newsletters geared toward day traders, and keep in mind that day trading-related seminars and classes may not be unbiased.