Day trading is among the top searches on Google when it comes to terms related to trading. The reason is quite apparent – it is the most popular and most profitable form of trading activity. But day trading is not for everyone, though. Day trading requires specific skills and strong discipline. While it is possible to gain skills through resources, books, and online courses, a lack of discipline is the reason most beginner traders fail.
If you intend to join the world of financial markets, you should know the most popular trading style by understanding what day trading is. It is imperative to delve into the mechanics of the process and learn how day trading works. This way, you will be able to make an informed decision about whether you should give it a try. To form your opinion and get a realistic picture of the risks and rewards associated with the matter, it is also necessary to look at the pros and cons of day trading.
What is day trading?
Day trading is a form of active trading where a trader buys and sells securities multiple times during a single trading session. Day traders open and close several trades per day. Their strategies focus on making profits from intraday price changes.
Their main principle is not to hold positions open until the next day, where all positions are closed before the trading day.
This type of trader uses various trading strategies designed to take advantage of intraday price fluctuations. Examples of day trading are arbitrage trading, speculation, high-frequency trading, and more. They rely on technical analysis tools and often trade on the news. The other key feature is that it usually involves the use of large amounts of leverage.
Day traders prefer highly liquid assets that they do not want to take risks and remain locked into a trade position (not being able to exit it due to lack of liquidity). It can be seen trading in all markets, but the most common include foreign currencies (the forex market), futures, and stocks.
How to do day trading?
As its name suggests, day trading works by continually buying and selling stocks or other financial instruments. All deals are created and ended within one trading day. As a form of risk management, day traders avoid opening trades overnight (leaving trades open for the next day) to not suffer from price changes that they cannot handle.
Typically, traders of this approach execute trades manually at a rate of 5 to 8 transactions per day. Those who rely on automated trading systems can execute tens or even hundreds of trades within a single day. When traders are not buying or selling, they focus on observing various markets, analyzing trends (trend lines), reading research and analyst notes, searching for news, or communicating with colleagues.
To understand how to trade daily, it is essential to also look at the average period for which traders are holding their assets that they purchase. The average time ranges from a few minutes to under an hour. However, in many cases, traders sell their assets even before the first minute.
So, what this means is that day traders rarely accumulate their assets. Given that they are making continuous movements and trading continuously, some analysts and industry experts refer to this type of trading activity as speculation.
It is also worth noting that day traders can practice their activities in one or more markets simultaneously. Single-place traders seek to profit from price movements in single or multiple assets. Those who buy and sell on multiple exchanges at the same time try to take advantage of the price differences between them and the arbitrage opportunities that may result in them. However, these cases do not last long as the financial instrument’s price at some point is the same everywhere.
The preferred tools of day traders share the following similarities – high liquidity and volatility (to profit from intraday price changes), lower transaction costs, the opportunity to trade on margin, and the rich information provided. This is why this type of trader prefers foreign exchange trading the most (forex trading), followed by trading futures and stocks.
To understand how to start day trading, here are the most critical steps you must follow:
1.) Take a look in the mirror
Every major professional endeavor begins with a self-evaluation. To see if you can be a successful day trader, you need to be honest with yourself and acknowledge if you have what it takes in terms of knowledge, skills, the right psyche, etc.
While you can easily acquire the skills and knowledge, you should consider whether you have the discipline and ability to tame your emotions and follow your trading plan. A regular daily trading session will present you with a lot of false or deceptive signals, and you should be able to acknowledge them and avoid making quick decisions.
This type of trading activity is high stress and requires a proper mindset.
2.) Estimate the resources
Take time and money as crucial factors.
Even if you don’t plan day trading for a living, you still have to devote many hours to be successful. For the central part of the session, you won’t be able to leave your desk as you risk missing out on some trading signals, news, and other fundamental factors that drive prices.
If you don’t have the time to dedicate yourself fully to the process, consider becoming an active trader or long-term investor.
Keep in mind that you might be on the losing side of 90% of the trades on some days and only make a profit of 10%, which might be satisfying enough. However, if you can’t handle the initial streak of losses, you won’t get to the point where your strategy makes money.
3.) Learn all your way
Like any other field, the road to mastering day trading is lengthy and requires excellent knowledge and skills. The good thing is that there are tons of resources for you to delve into and learn from. There are so many courses, books, guides, tutorials, videos, etc. that can end up leaving you confused about how to start or where to start.
To avoid such a situation, be sure to have a learning plan in place. Your goal should include everything from learning how the markets work and the characteristics of different asset classes, through the different types of market analysis and trader psychology, to research platforms and tools to assist you in your day-to-day trading activities.
4.) Get a successful trading strategy
A successful trading strategy means more than just “buying low, selling high.” A trading strategy involves a clear plan about what assets to trade when to buy and where to sell, how often to trade, how much capital should be allocated to each trade, the deal’s desired goal, etc.
No better illustration describes the importance of having and sticking to a successful trading strategy than the following quote:
5.) Start with a demo account
Even if you have some experience with other trading activities (such as active trading, swing trading, and other trading methods) and decide to switch to day trading, you do not risk starting with real money. Professional swingers or active traders reading this might feel a little intimidated or underestimated the move. In reality, day trading, given that it is more dynamic, will require a different type of money management strategy.
The pros and cons of day trading
Traders believe that day trading is the “Holy Grail” in the trading world. Long-term investors and more conservative traders don’t like this approach very much. The truth is that this type of trading method, as attractive as it may be, has proven benefits and risks.
The pros of day trading
High winning chances
The returns from the best traders of the day can make investment bankers jealous. Given the combined effect and capital accumulation over time, this means that day traders on their wonderful days can get better with their opportunity to expand their investment margin. And even if you are not among the best in the industry, you can still get a very decent life through it. Just be wary of the leverage.
If you can master day trading, this means that you can perform technical analysis, trade news, and take the backtest while navigating the markets under pressure, in addition to self-discipline and adherence to your initial plan. It also means that you are an expert in at least one asset class, making it easy to switch to other types of trading activities or engage in a long-term investment.
The cons of day trading
High trading costs
Day trading involves high trading costs in comparison to swing trading or position trading. As paying a commission on two deals is another matter, other fees are charged based on 8 or 10 deals per day. Day traders usually look for trading brokers that offer smaller spreads and lower trading fees.
Understandably, the potential to reap high profits comes with the risk of large losses. Since day trading takes place in highly volatile markets, combined with the fact that it motivates one to use margin trading means that, without a suitable risk management strategy, one can completely wipe out his portfolio in a few trades.
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