About Day Trading
Many people are interested in getting into day trading because it allows you to work from the comfort of your own home and be your own boss! Day trading can be a great way to make a consistent living and make money all on your own from home.
It’s also a way to lose money from the comfort of your home as many inexperienced or undisciplined traders have found out. Day trading can be a risky business, but before we get further into about day trading, you should understand that day trading is not investing, nor is it gambling.
Although it’s exciting, day trading isn’t for everyone. Traders work in front of their computers during trading hours, reacting to charts, quotes and a variety of other factors that go into trading. Traders make quick decisions because their ability to execute a large number of trades to generate small profits.
What is Day Trading
So what is day trading? The definition of day trading is trading shares of stock throughout the day or intraday in an attempt to generate short-term profits. Day traders close out their positions at the end of every day and then start all over again the next day. By contrast, swing traders typically holds a stock for a few days to possibly a few weeks. Whereas investors may sometimes hold for months or years.
Day traders close out their positions in stock before the end of the day and they rarely (if ever) hold any stock overnight. This protects them for the unknown risks of holding a particular stock of a company overnight.
Meanwhile, many other types of investors go to sleep thinking their position is in great shape only to wake up the next morning to find that the company is involved in a fraud investigation or announced terrible earnings.
Risks & Rewards
Day trading can be either profitable or unprofitable, and traders that take high-risk can generate either huge returns or huge losses.
Some day traders are able to make a consistent living, and some lose money or some go on to lose just about all their money.
Many day traders rely on leverage or margin, which is a use of borrowed money to increase potential returns. With the use of margin, many day traders can leverage anywhere from 2 to 4 times the cash balance of their account.
Margin accounts allow you to borrow money to buy stock and basically magnifies how much you can buy in your account. Your broker lends you the money because they want your trading business.
However, trading in a margin account is like a double-edged sword – it can cut both ways. If a stock goes up it will amplify your gains, but can be a disaster if the stock goes the other direction.
A responsible and experienced trader will know how to handle trading on margin and works with the correct amount of risk capital, which is money that the trader can afford to lose. A trader follows specific rules of his trading plan, such as using stop and limit orders to minimized loses.
Day Trading Styles
There are several different types of day trading strategies which may include a trader going long or short in a position.
Lets take a look at some of the different styles of day trading.
>> Trend Following
In the trend trading strategy, a trader seeks to enter a position in the direction of an existing trend that the stock is heading. This may include entering in a short or long position, depending if a stock is trending upwards or downwards.
Traders that use this strategy ride the trend for as long as possible and when the trend reverses this signals the trader to exit the trade. This trading strategy can work for day traders and swing traders as well.
>> Momentum Trading
In momentum trading, traders look for stocks that is in motion in one direction on high volume and try to jump on board to ride the “momentum train” to reach profits. This may include going long or short in a position.
Scalping is a trading strategy that looks to profit on small price changes. Their purpose is to buy (or sell) large amount of shares in blocks at the bid (or ask) price and then quickly sell them a few cents higher (or lower) for a profit.
>> Fad or Capitulation Trading
Also known as “fading” or capitulation trading, this trading strategy is used when a stock is at a capitulation point. A trader would sell short when a price is rising and buy when it’s falling.
The Bottom Line on Day Trading
In reality, day trading is tough and is a difficult skill to master. As a result, many of those who try it fail. Many traders that enter the game lack the discipline to adhere to strict rules and end up losing large amounts of money.
However, a disciplined day trader can be very profitable if they have the appropriate systems and money management in place. Traders that have been able to make a consistent living say they can’t imagine doing anything else.
Trading is like owning your own business. Like some businesses, some fail and some go on to succeed, and day trading is no different. With the proper education and discipline you can greatly improve your chances of beating the odds and become a trader.