Day trading is a type of trading method, which allows the opening and closing of the trades in a single day. The trader operating in this market can regularly track results and utilize a range of trading strategies.
This type of trading is considered comparatively easy, which is why even beginners often start their trading career with day trading rather than a paper trading account. Later, they either master this style of trading or move to other methods such as swing trading.
Let’s explore how feasible it is to set foot in this career. Read more to understand the pros and cons of day trading.
Understanding Day Trading
A day trader trades stocks multiple times in one day to acquire benefits during small fluctuations of the highly liquid markets.
Generally, when investing or buying and selling stocks, a trader buys the stocks at a lower price and tries to sell it at a higher price. However, a day trader works differently. They also purchase and sell stocks but in a few hours rather than years.
In this case, every small and minute fluctuation in the market counts. This is why a day trader needs to complete multiple transactions in a day for successfully earning profits. But, it is necessary to understand that more number of trades also indicate more cost of trading. So, that reduces the efficiency of day trading to some extent.
Let’s explore the pros and cons of day trading.
Pros of Day Trading
When a day trader understands the details of these trades, it is easy to earn high profits in a very short duration. Hence, a large number of investors invest in this market regularly. Here’s why:
One of the best reasons for choosing day trading is because it allows an array of trading strategies such as counter-trend trading, breakout trading, and trend-following trading.
As the name suggests, the counter-trend trading includes strategies which move in the opposite direction of the trend. These traders try to catch the changes and corrections, which may occur in the market after a long period of downtrend or uptrend. However, this trading strategy is not for risk-averse traders because it involves high market risks.
In breakout trading style, day traders try to keep up with initial volatility, which surfaces after price breaks. Using this strategy, day traders can create a pending order that is set to catch the breakout. This is possible because pending orders are moved to market orders when the price touches a pre-decided level.
The trend-following strategy works in favor of the intra-day trend. This is a popular strategy because it has highly rewarding risk-to-reward returns with comparatively high success rates.
These strategies also indicate that the day trader has a choice to select the strategy according to their risk profile. This makes day trading suitable for low-risk and medium-risk individuals as well.
Considering the fast nature of day trading, it brings up multiple trading opportunities in a day.
For example, a lot of day traders follow the intraday timeframes, which include 4-hour, 1-hour, 30-minutes, and 15-minute options. These respective timeframes have many more tradable opportunities for day traders than swing traders.
However, here it is necessary to understand that the shorter timeframes have comparatively more noise when compared to longer timeframes. Hence, any trader can easily accumulate multiple losses when their stop-loss level is slimly decided.
Further, of course, day trading has more options. But, these options don’t amount up to more profits every time. Having a trading plan and strategy helps in converting these opportunities into profits.
Every trading landscape is affected by the news, whether good or bad. During these reactions, you may observe big-scale movements, even when the news is not directly related to the day trading market. An expert day trader can reap high profits at the time of these fluctuations.
Flexible Work Hours
Day traders have another major benefit in their favor. They always have an option to trade at any hour. For example, a day trader can start trade on Sunday night and close on Monday morning. The market remains open, so it allows the trader to work flexibly.
Cons of Day Trading
Similar to other trading markets, day trading also has multiple drawbacks. However, don’t worry, most of the time, you can avoid these drawbacks with experience and the right strategy and planning. Let’s see how:
Think about it. You need to trade more times in one day when compared to other trading firms. Hence, naturally, this type of trading incurs more trading fees to the investor.
You can mitigate this risk by selecting the right broker for your trading. Take fixed spread brokers, for instance. If you are trading on the news, you can select these types of brokers for spreading your risk of losses.
Keeping a keen eye on this fact is very, very important for a day trader. Small losses can accumulate in the long-run and ruin your profits. Closely monitor your losses and risks and try to mitigate this cost risk as much as possible with the right broker.
Risk of Ruin
Let’s be honest, it is not hard to fall on the opposite side of profits in day trading. Although a great number of traders are able to attain profits from the day market, some go too far and end up with losses.
The only thing which can help in mitigating this risk is by strategically planning your day trades and creating a risk-management plan to cap your benefits. This may reduce your profits, but it can also decrease your risks.
There’s more market noise in the day trading market, which arise due to unexpected price behaviors that we can’t define technically. This noise may not have a big impact on the trading aspects of a swing trader. However, it can disrupt the profits of a day trader.
The only way to reduce the risk here is to make your stop-loss level wide. Also, check previous volatility to set stop-loss below or above resistance levels.
Every trader has their own trading style, caliber, and risk profile. Based on these factors, day trading may be extremely profitable for some but extremely risky for another. For this reason, it is suggested to assess your risk profile and knowledge before choosing day trading as your full-time career path.