Real Facts About Day Trading
Day trading is a securities trading strategy that requires that the trader close out of their positions at the end of every trading day. It's a challenging profession requiring intensive labor, study, preparation and substantial risk tolerance. The rewards for developing day trading skills can great, however, and it can provide a substantial income to those with excellent money management skills.
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Identification
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Day traders react quickly to the market, often buying and selling a stock within the same hour. Most day traders rely on margin---or borrowing money---to increase their profits from trading on relatively small percentage gains. They try to rack up consistent profits, making as many winning trades as they can while managing their risk. Day traders can trade in any market and security, including currencies, options, stocks, bonds, futures and other investment products. Most day traders work independently, but others choose to work for a brokerage firm or other investment business.
Warning
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Day trading does not guarantee riches. While single trades often realize profits in excess of 100% on very active days, it is a challenge to consistently hold onto capital. Successful day traders often beat the market by substantial amounts, but many others wipe out their capital quickly do to repeated mistakes and a failure to protect their holdings. For people with a gambling mindset, day trading can lead to financial disaster.
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Prevention/Solution
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Beginning day traders should begin with sufficient capital that they can realize enough gains to live on the proceeds. For most people, this requires an account in the mid- to high-five-figure range. Trading is a skill that requires a great deal of practice and preparation. Before jumping into day trading, learn as much as possible about the market and yourself as a trader. Trade on a longer term basis before attempting to day trade. Learn how you respond to the inevitable stresses involved in trading.
Function
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Day traders tend to make relatively few trades each day---generally between two and twenty. They spend most of their time watching the market for good stocks to trade. Staring at a set of moving stock charts for eight hours every day requires tremendous discipline. Successful day trading also requires that the trader accept losses on a regular basis, work to minimize them and move on.
Expert Insight
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Anyone considering leaping into day trading should consider it a professional calling. While day trading may not require nearly as much research into company fundamentals as longer term trading, it does require an entirely different skill set of watching, understanding and reliably predicting market movements. In most cases, traders develop their own system of rules to help them avoid emotional reasoning that might lead them to either sell a stock too early or hold onto one for too long. Educate yourself about trading and practice on longer term, lower pressure forms of trading before attempting to make it an occupation.
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Resources
- Photo Credit mudpig, Flickr
