Before you learn how to day trade, it helps to get a big picture of the profession by understanding the pros and cons of this demanding, potentially very profitable profession.
As is the case with every other way of making a living, buying and selling securities within a single market session has its pros and cons. Depending on your personality type, willingness to work hard, and several other factors, you can make a good living.
Knowing the advantages as well as the disadvantages will help you avoid some of the common pitfalls that beginners are apt to encounter. Here’s a summary of the pros and cons of this attractive, demanding profession.
Pro: There’s Zero Overnight Risk
Compared to all other market professionals, you won’t have any overnight risk. That’s because, by definition, you cash out before the final bell each afternoon. Whether you’ve had a bad or good day might cause you to feel up or down, but at least you will never go to bed wondering what might happen to your funds.
However, if day trading is a model you are going after, it’s important that you also have a good understanding on the amount of money you need as a minimum in your account, or how many trades you can make within a day.
For example, when on E*Trade, one can jump in and out of stocks and not have a limit on how many times they can make a trade, as long as the balance is always over $25,000. This is also a special request that needs to be made on your account, otherwise you would be limited in your trading abilities and would have to wait for your day trades to clear before entering a new one.
Con: It Can Be Tough to Identify Opportunities
In so called sideways markets, you might go an entire week without seeing one good opportunity. It can be frustrating to think you’re wasted an entire week, but remember that every session is a learning experience, even if you don’t have any of your own capital on the line.
Pro: Profits Can Build Quickly
With persistence and patience, it’s possible to earn rather high profits on just a few accurate calls. Keep in mind that there will be sessions when you make several incorrect guesses as well.
However, the high profit potential in swing trading is one of the main reasons people get into day trading in the first place.
The pros and cons of swing trading are:
- You need to devote less time to swing trading.
- It captures most of the upward and downward swings in price action.
- You can focus on technical analysis.
- You increase your risk by holding positions for longer periods.
- You could face sharp market reversals that generate losses.
- You can not take advantage of day trading leverage.
Con: Stress Can Be High
It’s pretty obvious that stress levels can be high in a job like day trading, primarily due to the constant focus required. To avoid letting it get to you, try taking short stretch breaks during slow times, like lunch hours or when you have no active buys to keep an eye on.
Pro: You Can Specialize
It’s possible to work with just one or two securities and scalp profits from their price movements on a regular basis. This is one way of becoming an expert on a particular company and learning the nuances of its daily behavior, reactions to industry news, and other market events. Specializing means you won’t have to put in extra hours on research and won’t have to watch multiple charts. That’s one way of avoiding the distractions that typically bother intra-session traders.
As with all business models, there are many different ways to make money in the world today. The same holds true with online trading and how you play the stock marketing. If you follow along with any of the top investment blogs, you will see that many people like to invest in names like Apple and Microsoft, while other day-traders might be more interested in penny or OTC stocks.
There is nothing wrong with each of these methods, but they are completely different in the way they need to be approached and how money is invested.
Con: You Have to Watch Commissions Closely
Even if you trade on a discount platform, you’ll be making so many trades that you have to be observant about commission charges. In fact, this will be one of your highest categories of expense for your business. One way to keep commissions in check is to record the amounts when you close out. There’s also a chance you can find a broker who offers package deals or charges a flat fee per month for any number of transactions you make.
The Exciting World of Investing and Day Trading
If you’ve ever wanted to make money with stock market and quickly jumping in and out of stocks for quick profits, you aren’t alone. Even with the market swinging all over the place lately, there is a still of ton of opportunity with trading stocks in the Dow or Nasdaq, but enterting the world of penny stocks and ones listed in the OTC can be even more thrilling.
Mobile applications and online trading makes playing in the stock market easier than ever before. Some applications will even let you get started for free or give you accounts that allow you to start with fake play money.
As with all investments, make sure you put in the necessary time and effort to understand where your money is going and what your investment plan might look like.