How best to describe the essence of day trading
This lesson will cover the following
- Day trading is not equal to investing
- Day trading is not equal to gambling
- Day trading is related with stress and does not guarantee success
There are plenty of speculations about day trading. Some say that day traders mostly lose their deposited money, while others think that day traders are, in most cases, successful. There is also another view, according to which day trading is a path to alcoholism and even insanity. Let us clarify what exactly day trading is and what it is not.
We cannot equate day trading to investing
Day trading is inappropriately compared to investing. Day traders DO NOT hold their positions for more than a single trading day. Swing traders may hold theirs for a few days or a few weeks. Investors, on the other hand, rely on their possessions during a far longer term, some of them may hold positions for decades.
Day trading has a crucial role in international financial markets. It ensures that price changes, which bring demand and supply of the markets, are balanced! However, day trading does not provide sources of fresh capital for business entities and governments worldwide, therefore, it does not support economic growth in a long term.
Day traders usually withdraw their trading funds regularly. Many of them attempt to construct a long-term portfolio, which to ensure other business activities or simply their retirement. A day trader may also prefer to appoint an expert to oversee his/her portfolio.
We cannot equate day trading to gambling
There is a widespread view that day trading is just a form of gambling, while in gambling the chances always favor the house. Well, when it comes to day trading we can say that the chances are even in a number of markets. Markets, where options and futures contracts are traded, feature as many winning as losing players. These markets are preferred also by individuals or institutions, willing to hedge their risk exposure (we have discussed hedging in our Forex Trading guide).
In the stock market, especially in a long term, there is a chance for more successful trades than losing ones, thus, the odds favor traders.
What is more, in every segment of financial markets the successful trader is the one with solid knowledge, preparation and discipline. In gambling preparation and discipline tend to have little or no importance, because the odds favor casinos. There are cases, when people with addiction for gambling decide to begin day trading. However, it is not particularly appropriate, because inveterate gamblers tend to make bad decisions regarding entries, limit settings and exits at the end of the trading day, all of which result in solid losses.
We cannot say that day trading guarantees success
It is difficult, but yet not impossible, to day trade. Everyone can boost his/her chances of success in the markets by spending enough time educating and practicing. Then comes the choice of appropriate leverage and initial margin to start trading. There are a number of researches on the matter if day traders make money and the majority of conclusions pointed that the rates of success were low. Few, who decide to engage in day trading, actually succeed, but, to some extent, this is because few, who take this up, have the knowledge and discipline to withstand the spectrum of risks, that accompany trading.
Although many people lose a portion of their deposited money or the whole amount in the markets, there are others, who are aware of all the risks and rewards and through proper management achieve good results. They operate with risk capital, or the amount of money they feel comfortable to lose. They predominantly use limit or stop orders to minimize losses and always close their active positions at the end of the trading day.
Another aspect of day trading is the use of leverage, or in general the use of borrowed funds in order to improve performance. However, it also leads to a greater risk – a trader may lose more than he/she initially deposited. No broker wants such a scenario to develop, thus, most brokerage companies will likely close an account, which is endangered by ruin. This way the potential loss is restrained. (For more on leverage visit our Forex Trading guide).
Day trading involves stress
Day trading is accompanied by high levels of stress. At times it juices ones energy in his/her attempt to concentrate on what is currently unfolding in the markets, especially as real money is put at risk. At times the amount of profit from a single trade or a series of trades may be far too little than what one expects. This causes a trader to be more tenacious and to enter in a larger number of trades until the trading day is over. There are traders who simply cannot withstand the stress, there are others, who plunge in frustration or boredom. And last but not least, there are people, who cannot imagine doing something else for a living, so they day trade, as this is what they really enjoy. Having an appropriate mindset and knowing how to manage emotions is what makes the difference. (For more on trading psychology visit our Forex Trading guide).
However, there are other fields of occupation, which also provide a not so easy way to make a living in ones view, but are the “dream professions” for other persons. Every professional field has advantages and disadvantages, so day trading makes no exception. Once a person understands the risks of each profession and keep them in mind at any time, he/she will be able to cope easier with any negative scenario, that occurred as a result of his/her mistakes.