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Day trading is a common term in economics and finance. Numerous beginners in financial markets are more captivated by the virtues of this trading style than those of other longer-term strategies. Still, is day trading always a smart option for both novice and experienced investors, regardless of financial instruments? Let’s find out the answer in this article.
Is Day Trading a Good Idea (2021)?
Day trading is, by definition, the practice of purchasing and holding financial assets (e.g. stocks, bonds or foreign currencies) for a time being to profit from small price fluctuations. Normally, day traders will open a position and close it within the same business day. Financial markets provide participants with different trading hours, for example, forex is operated 24 hours a day in different trading sessions or the stock market can open in two distinct timeframes as 1.31 PM – 8 PM GMT+0 and 7.25 AM – 2.29 PM GMT+0. Therefore, day traders often stay out of financial markets before their predetermined closing hours. Should they continue trading after such closing times, their positions will be held overnight which may suffer unmanageable risks and need to pay swap fees to brokers.
Day traders intend to utilize high leverage levels, high capital amounts, and different short-term tactics (e.g. scalping, range trading, news-based trading, and high-frequency trading) to obtain substantial gains from small price changes. This short-term trading style is highly preferred because of the various advantages it brings as follows:
- The constant presence of day traders provides financial markets with higher liquidity. Indeed, as those traders think they will earn an insignificant profit after a winning trade, they often conduct as many transactions as possible to increase the possibility of the total substantial gain. Accordingly, their regular attendance may encourage investment flows and create a liquid market, which allows them to easily find the counterparty to their transactions without fear of significant changes in value;
- The more trades investors perform, the more frequent proceeds they may receive if they have a proper trading plan;
- Day traders need not glue their eyes to screens day after day to observe market trends and attend trading sessions. Instead, they just pay attention to the most movable time of investment products and benefit from price fluctuations. For instance, if you speculate on EUR/USD, the favorable trading time ranges from 1 PM to 5 PM GMT+0 when both London and New York trading sessions overlap. Besides, some can base the opening of positions on the release of major news which considerably affects markets;
- Day traders are not concerned about overnight-related risks such as remittance of rollover rates (commonly known as swap fees) or possibly unprofitable movements;
- When beginners employ day trading, they may obtain feedback quickly for their trades. Unlike swing or position traders, their intraday counterparts often spend 1 – 2 hours staying on the market for a single trade. They also attempt to limit 10 trades per day. Still, amateurs may choose such time frames as M1 (one minute) or M15 (fifteen minutes) to carry out transactions. That short time helps them quickly see how a position is opened and closed or how markets work, accordingly make them more familiar with trading.
Various people argue that day trading is one of the methods that turn them to billionaires overnight, besides doing startups and investing in real estate. Some successful examples confirm this statement. Plus, inordinate amounts of hype exaggerate the nature of day trading, make it become a so-called lucrative career and attract huge flocks of traders.
Is day trading always a good idea though? The answer is no. This trading style is not for all people, especially those who either formulate improper trading strategies or incompletely understand financial markets. Enormous pros of day trading always accompany its unanticipated cons, so inexperienced traders may suffer abject failure when markets turn against them.
Why is Day Trading Bad?
Day trading is definitely not a scam. Nevertheless, the odds against making a large income in this business is so huge that individual traders, especially beginners, are discouraged to utilize it as part of their trading strategies regardless of investment offerings. Economists and financial experts do some sharing about reasons why they express negative reactions to day trading as follows:
The nature of day trading is venturing on small price fluctuations of financial assets with the hope for gains within a trading day, as already mentioned. Speculation is often believed as a form of gambling that involves high stakes and a win rate of nearly zero. When investors day trade any financial products, they are playing the guessing game of upcoming market trends. Without experience and proper analysis of price patterns, their decisions seem arbitrary. This will take a heavy toll provided they bet on the wrong side of the market.
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Difficulty in Predicting Price Action Exactly
No matter what individuals long to do, such as becoming a master chef or owning a small store, it always requires their commitment to time and knowledge. Intraday trading on any investment products is not an exception, let alone its “gambling” nature that requires more endeavors to make accurate predictions of markets. Still, day trading is a short-term strategy; this means for a time being, amateurs hardly identify price movements correctly because they have insufficient data and lack in-depth analysis to back their predictions up. As a result, they may make an inaccurate judgment about markets and end up losing their shirt.
For beginners, getting accustomed to financial markets does not suffice to increase their odds of success. They need to grasp the performance of distinct markets, use trading and analytical tools efficiently to assess price action from a technical perspective, and fundamentally analyze important events announced periodically to see how they affect financial markets. Even experienced traders impossibly issue correct forecasts at times. So it is unsurprising that novice traders who lack experience and essential skills rarely make wise decisions when they day trade investment products.
Proper Capital Requirements
Capital is another issue for intraday traders. They often struggle with how much should be invested in instruments. Individual traders do not often have large capital for trading. Meanwhile, too small investments give them insignificant profits which cannot compensate for possible trading commissions even if they have some winning trades in a day.
Brokers now provide clients with the leverage tool which allows them to borrow money for trading without interest rates. Traders in some markets, typically forex, can augment their deposit up to 500 or 1000 times. Low capital cannot protect them from massive losses induced by high amounts of leverage though. Alexander Kaerns, a 20-year-old boy, committed suicide after receiving over US$700,000 negative balance from magnifying his investment in stocks. Without proper strategies and trading experience, retail traders may easily pose themselves to the same situation as that university student.
Various day traders are advised to start small, but not told about how small their capital should be. $500 or $1000? There is no specific answer as it still depends on different factors such as trading goals, strategies or experience.
Intense Competitions with Professional Traders
When participating in financial markets, retail day traders have to vie with professional players who represent large institutions and organizations. The latter is well-equipped with market-related information as well as the latest technology tools and databases that support their evaluations. In other words, they are financial specialists whose experience and professional knowledge outperform that of individual traders. Inevitably, if a person is earning a profit, someone else will lose money. Therefore, in the game, professional day traders seemingly have a competitive edge over their retail counterparts.
Research has shown that an insignificant percentage of day traders have a chance for financial returns. Numerous traders think they can be part of that figure. If someone makes money, other people believe they will get returns as well without considering the failure probability caused by their poor preparations or unexpected trends. This “social mood” can make investors wrongly judge financial markets and fail to anticipate involved stakes.
What Percentage of Day Traders are Successful?
The published research report by university professors stated that merely 13% of day traders make a profit annually. Even less than 1% of them make instant money from speculating on investment products. Triggers behind those atrocious figures vary.
When trading on markets, day traders usually carry out many transactions to boost their win rates. However, even when they copy trade setups or strategies from other successful investors by using specialized tools, their success is not guaranteed. This is because different trading plans are drawn out to match market conditions at some distinct points. Traders themselves have to review and modify strategies frequently to ensure they take full advantage of markets. The indiscriminate use of others’ plans without thought or the development of inefficient strategies may lead to worse consequences.
Commissions and taxes are worth concerning as well. There is no free trade. What traders obtain after incurred costs and taxes are deducted is a net profit. Should their revenues be lower than those expenses, their account balance is still negative.
In short, how successful several day traders are, rookie investors are warned off using the short-term trading style owing to its unprecedented impacts.
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