Day trading seems like a very exciting way to participate in the stock market. In this form of trading, you basically trade investments like stocks, bonds and other instruments many times in a day. Typically, a position is never held for more than 24 hours. Day traders hope that the value of their investments will rise or fall in that short span of time that they are holding it so that they can make a profit.
There is actually no law that prevents anyone from day trading so its legality cannot be questioned. For as long as you don’t defraud anybody with the practice then it is also ethical as well. The problem with day trading is that you take on a lot of risk which can make you lose a lot of money the longer you engage in it. If you really want to become a day trader, it is highly recommended that you take on this job part-time and not quit your fulltime job no matter how much you have profited in your most recent transactions.
Before you can become a day trader, you’ll have to learn the ins-and-outs of the business. This can be done by enrolling in a course that teaches you how to make trades using expensive software and following complicated mathematical rules. Aside from the cost, the problem with this training is the fact that they are taught not really by those who have succeeded as day traders. The training is focused on teaching students how to use the software but not really on how to make sound and profitable buying and selling decisions.
Another reason why day trading is destined to be a losing game can be seen in the fact that the stock market generally rises with time. This is why stocks are considered long-term investments. When you only hold on to these stocks for hours or minutes, the effect is that the value also goes down. You don’t get to really appreciate the worth of these stocks when you day trade.
Commissions can be hefty when taken into consideration. Since you have to pay commissions each time you make a trade, they add up eventually so that in the end, you’re not really making any money. If you’re making the trades in behalf of other people, what you’ll get are the commissions. If you are making the trades using your own money, then, you’ll eventually end up on the losing end.
All things considered, you can never expect to win as a day trader. There may be a select few who have beaten the market because of a strategy or system that they have uncovered but it is highly unlikely that the feat will be repeated, especially if they start selling their strategy to others. History has shown that day trading rarely profits, only losses—and those who invest big money can certainly expect to lose big money.
If you’re the type of person who loves to be up and about, the nature of day trading itself is the reason why it won’t get you anywhere. You’ll have to spend a lot of time looking at the computer, determining if there are trends, no matter how insignificant, that you can take advantage of. If you don’t have this advanced computer equipment yet, you’ll have to spend for it as well. If you want to go into day trading as a fulltime job, you have to really be able to concentrate on your computer and the dozens of ticker quotes and price fluctuations where you can attempt to spot trends that you can exploit. It’s not healthy and it’s going to suck the life out of you day in and day out.
Day trading is also a field replete with many false “hot tips” and “gurus” who say that they have discovered a proven system for success. There are just too many scammers these days who tell you that they have inside information on a particular stock or have advice that they want to share. Unless you are sure that these come from trustworthy sources then you’ll end up getting fooled.
Finally, another reason to avoid day trading is that it will encourage you to use borrowed money in order to make profits. This is what puts many day traders in debt and consequently in financial trouble.
Despite all the above warnings about day trading and you still want to play the stock market through this avenue, here are some tips to help you avoid losses as much as possible:
1. Learn the day trading game from someone who is qualified.
That someone should actually be a day trader and have a decent record of making money from day trading. You should also supplement your knowledge with your own readings and research. Get the lowdown before you make your first trade.
2. The capital you use for day trading should only be for day trading.
The money you use for day trading should not be funds to pay off your debts or other financial obligations. It should not be funds for your bills or allocated for your retirement savings. Rather, this cash should be for day trading alone. An equally important realization is that you could lose these funds at any point during the trading so it is much better if the money you have allocated for this endeavor is money you can afford to lose. A minimum of $50,000 is the recommended minimum for those who want to day trade.
3. Invest in the best equipment.
You can’t expect to day trade if your equipment is not up for the task. You need ultra-fast Internet connections—yes that’s plural because backups are necessary in case your primary connection fails—and dedicated software and research tools that would enable you to get access to quotes and tickers in real time. Without this kind of equipment ready before you even make your first trade, you’re bound to be on the losing end of day trading.
4. Keep an eye on the markets.
While you should take advantage of your knowledge about past market performance as well as its future movements, day trading is concerned with the present. Thus, you must engage in real time trading, taking into consideration current events both in the market and the other factors that affect it.
5. Day trade when you are at your best mood.
When you are stressed or depressed, your actions on the day trading floor are going to be affected. You need to be calm and rational on each trading day. Otherwise, you are going to make mistakes that are going to cost you a lot of money.
6. Don’t reinvest all profits you make.
The danger with day trading is that you can treat it like a gamble. If you make profits, you reinvest everything into a bigger trade, hoping that you’ll reap even bigger profits. This is a losing proposition because you could lose all your money in the next trade. To make money from day trading, save the profits you make and play only with the risk capital you have.
7. Immediately recognize when a trade is no longer worth it.
If you notice that a trade you had made is not going to be profitable, cut your losses early. Consider the investment you had initially made on it as a sunk cost and get out of it right away. You’ll have to be really quick about this as a day trader but it’s better to cut losses early in the game than have to wait until your losses have already increased.
Day trading is a very risky game. It is better left for those with MBAs and PhDs in finance who have the fastest equipment that can give them the most recent information they need to guide their trades. It’s not for the average guy who dreams of making big money through the activity. Claims of huge profits are not really true as far as day trading is concerned. You’ll need to be immersed in it fulltime if you want to make money—and even then, the profits are not really that staggering as what some claim it is.
There are very real dangers to engaging in day trading. You could lose all your money in just a single day. If this money is what you use to save for retirement or pay the bills, you are going to be in for a very rough time financially. Some have gone bankrupt because they were not wise enough to spend only the money that they could afford to lose in their day trading endeavors.
You could limit your risk by getting the best equipment and getting trained by the best coaches but in the end, you’ll almost always lose when you engage in day trading. It is much better to stay out of day trading and leave it to those who eat, live and breathe the stock market both in their waking and sleeping hours.