Day trading stocks can be a very attractive prospect. Adding to your living by trading can seem far more exciting than you average nine-to-five. The problem is, careless or inexperienced day traders can do a lot of damage to their portfolios very quickly. If you’re interested, read on to learn more and how day trading works and how you can minimize the risks involved.
What Is Day Trading?
Day trading is the practice of buying and selling stocks in a short timeframe, usually a day. The aim is to earn a tiny profit on each trade and then combine these gains over time. Online stockbrokers and cheap trades are on the rise, making day trading into a viable, if risky, way for retail investors to turn a few quick wins into some substantial earnings.
In reality, retail investors have a hard time making money through day trading. The small number who do make good money usually devote their days to day trading, using tools like Metatrader 5, and make it a full-time job, not just a hobby or something done quickly on their lunch breaks.
How Day Trading Works
Day trading can be very volatile. Day traders must rely heavily on a stock or a market’s fluctuations. Look for stocks that bounce around a lot throughout the day, due to a good or bad earnings report, positive or negative news, or just general sentiment. Successful traders like highly liquid stocks, that allow them to move in and out of a position without much affecting the price of the stock.
Day traders might buy a stock if it moving higher or short-sell it if it is moving lower, in order profit on the fall of a stock. They might then trade the same stock many times in a day. They may buy a stock, then short-sell it the next day, taking advantage of changing sentiment. Whichever strategy you choose, keep looking for a stock to move, and remain as efficient as possible.
Why Is Day Trading Hard?
There are two big reasons that make day trading challenging.
Retail day traders are competing with professionals. Professionals know all the tricks of the trade already. They will have access to expensive trading technology, data subscriptions, and personal connections. The pros are set up to succeed, and even then they often fail. Among these professional traders are the high-frequency traders, who look to skim small amounts off every trade. The field is a crowded one, and the professionals love when inexperienced investors join in. Their inexperience can help the pros to make a profit.
Retail investors are prone to psychological biases that make day trading hard. This means that they can sell winners too early and hold onto losers for too long. This is sometimes known as ‘picking the flowers and watering the weeds’. It’s easy to do when you get a hit of adrenaline after the closure of a profitable trade. Investors can then get caught in loss aversion, which makes them too afraid to buy when a stock declines because they worry that it might drop even further.