What is Day Trading and Why is it Good for your Finances?

Dec 14, 2019 by

Day trading is one of the most lucrative activities that disciplined investors should consider. With a carefully crafted master plan, it is possible to make huge sums of money off the activity. That is not to say that day traders do not face risks. They do. It is even possible to conclude that day trading is one of the riskiest investment plans there is—traders have an equal chance of losing money as they do gaining money.

What Is Day Trading?

This image has an empty alt attribute; its file name is buy_low_sell_high.jpg
Image via Flickr by OTA Photos

Day trading is an investment strategy where investors open and close positions during the same day. The aim is to take advantage of small intraday price fluctuations and make profits. Traders typically take long positions, buy financial instruments whose prices they expect to appreciate during the day, and sell them before the end of the session. If they anticipate a bear run, they are likely to sell any stocks held before buying them back when the prices are low and likely to start rising again.

How Many Day Trades Can an Investor Make?

There is no limit to the number of trades an investor can make. Most traders enter into multiple trades on a given day. Positions change from long to short, and vice vasa, sometimes in a matter of minutes (and sometimes hours). The distinguishing property of this strategy is to exit all positions before a trading session ends.

How Do Day Traders Make Profits?

To make profits, traders rely on the volume of the trade entered. Price fluctuations are likely to be very small. Picture a situation where the value of a stock increases by two cents, which is a usual occurrence in day trading. A trader with stocks worth $1,000 will exit the trade with a profit of $20, while a trader with $10,000 invested will exit with $200 in profits. Success is as much about capital as it is about research and risk management.

Which Financial Instruments Are Good for Day Trading?

Day traders typically opt for instruments with high price volatility. They use advanced techniques like charting to determine which stocks will exhibit a certain behavior. Besides volatility, traders also prefer instruments with high liquidity (those that sell quickly). The combination of volatility and liquidity makes day trading possible. The former allows traders to determine when to buy and sell, and the latter ensures they exit their positions before the day ends.

Going by this selection criterion, day traders will most likely prefer the following assets: currencies at the forex market, fast-moving stocks, cryptocurrencies, derivatives, futures, options, and commodity indices.

Is Day Trading Good for Your Finances?

Yes. The main advantage of day trading over any long-term investment strategy is the compounding of gains daily. Generating average returns of 1% every trading day, for example, leads to monthly returns of over 50%. The other benefit of intraday trading is that it eliminates overnight risks. Late-night news does not expose capital to unexpected risks.

Interested in learning more? There are always great day trading books available. It is not difficult to make a successful trader, but it is not easy, either. A trader needs to forecast asset price fluctuations with considerable accuracy, have a well-defined risk strategy, and invest heavily in training.

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.