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Understanding Day Trading and If It's Right for You

by Staff Writer
12 Apr 2019 at 09:28hrs | Views
Most people who drift off and have thoughts of quitting their job during a stressful day and trading stocks for a living are daydreaming about day trading. Careless or inexperienced traders can lose their nest egg and wreck their lives in the blink of an eye if you're not careful. But those who apply strategy and risk management can make a significant investment. If that sounds interesting to you, read on to learn how day trading works and how you can help mitigate risk when day trading.

Where to Begin?

Buying and selling stocks in a short time frame throughout a day is the short-answer for those wondering what is day trading. The goal is to earn a smidge of profit on each trade and then compound gains over time by day trading them to earn more. The process sounds super simple at face value, but it is one of the hardest types of trading to do successfully consistently. Online stock brokers and cheap trades have made the appeal of day trading more accessible to the masses. Most successful day traders treat it like a full-time job, rather than a few quick hours of trading. A recent 2010 study indicated that only 1% of day traders are able to earn profits consistently. Those who do devote days of practice to day trading to hone their craft. In other words, it's not something you can manage between your own busy schedule.

How Day Trading Works

Most day traders want to see a stock with a lot of volatility. They rely heavily on these volatile fluctuations to earn profits. That's also one reason why day traders don't care if a stock is going down or up or the cause of these fluctuations. Some day traders will make multiple trades of the same stock throughout the day to capitalize on various movements throughout the day. Whichever strategy a day trader uses, you can bet it's based on price movement and making the most of it rather than long-term sentiment.

Why Day Trading Is Hard

Day trading is hard because they are competing with professionals who know all the tricks and traps. Professional hedge fund managers have the expensive trading tech for spotting every single day trade that comes across the stock scanner. These trades are designed to skim pennies, and it is a crowded field, so there are tons of competition. This competition can bring even more volatility to a stock than predicted when lots of day traders are shuffling the stock around. Psychological biases are also the natural enemy of day trading. Selling winners too early and holding losers too long are often the results of getting too emotionally involved in the trade. Most day traders call this pattern picking the flowers and watering the weeds. Successful day traders have to pay taxes on their net-short-term gains at the marginal tax rate. That can be as high as 37% depending on your income bracket. The upside to this is that gains can be offset with trading losses.

Source - Byo24News