Which types of people should avoid day trading
You will learn about the following concepts
- General thoughts on day trading
- Which character types are unsuitable for day trading
- Required resources to day trade
- Qualities required to day trade
In the previous article we outlined some of the main reasons why a person would choose day trading as a way of livelihood, among which were the independency, mobility and income prospects. However, we also mentioned that day trading is not suitable for everyone, starting with risk-averse people, and in the next paragraphs we will widen the circle of inappropriate character types.
First of all, as we said in the previous article, people who cant stand losing money have absolutely no place on the financial markets as a whole. Day trading, as part of those markets, carries significant risk of losses, especially when it comes to trading leveraged financial products. Many people prefer to work for a fixed salary where they know exactly how much their hard work is valued. They are used to the fixed income they receive each month and dislike and avoid the possibility of risking part of that income, even if it is going to yield them some extra money. If such people decide to invest, they will most likely turn to treasuries (government securities), or corporate bonds with investment-grade credit rating.
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Not pure investing
When it comes to investing, then yes, day trading is a kind of an investment you make. You need a certain amount of starting money, a plan how your training and working process will go on, and a lot of time to fulfill that plan.
However, despite those similarities, day trading is not the same as investing. Investing is a broader category of financial activity, which includes buying, holding and selling different types of assets in the short, medium and long term. In comparison, day trading is all about swiftly buying and selling securities on a very small time frame in order to take advantage of small price movements. This tends to happen multiple times per day. You can say that the day trading strategy can be a part of your investment portfolio, but if you are a long-term investor or/and you have another primary job, then day trading is definitely not for you.
Having mentioned corporate bonds, we get to the point of fundamental analysis and research. People who are drawn to making comprehensive, in-depth analysis of a companys history, products, management, current performance etc. are generally not suited for day trading. That type of investors take their time to scrutinize each detail of the companys earnings reports, follow up on public appearances and announcements of key management figures and attempt to predict the companys performance outlook in order to assess whether it has a bright future or not. Based on that analysis, this type of investors most often use the buy-and-hold strategy – they buy shares and keep them for the long run to sell later at a much higher price, if their forecast for company growth turns out right.
In contrast, all that matters for day traders are the prices short-term fluctuations and how to make money predicting them. Commonly, these traders are not interested in the companys history, they might not even know in what sector of the industry it operates or how formidable its competitors are. Of course, if good corporate news come out the same day, a day trader would hardly ignore it, but that will affect his decision-making only at that particular moment or mostly during the day, i.e. the current trading session.
Money and time
Even if you are a risk-prone person who has huge interests in economics, keeps a close watch on the financial markets and craves to be independent, you need two more crucial factors at your disposal – starting money and time.
In the previous article, we underscored that you need to have a certain amount of trading money to start with, which however must not be everything you have. We said that having enough cash set aside to cover your rent and everyday expenses for 5-6 months excludes additional pressure stemming from the possibility of sleeping on the street in case you have a bad start at day trading.
However, the most expensive resource you will need to spend is time. Becoming a successful day trader, in fact any trader at all, will require a good amount of experience, which is earned only by standing in front of your monitor for many months, and even years. This is time that you could alternatively use to work something else, improve some of your other skills, or spend with your family.
Having day trading as a hobby will not work for you, you can be sure on that. Sitting in front of the trading platform for 5-6 hours per week after work and not dedicating your full attention toward improving yourself will be a constant money sink. Sure, it may still act as a hobby, in that it will bring you joy when you exit a winning position, but in the longer run the outcome will be only one – persistent losses. When you think of it, that is closely resembling gambling. Therefore, if you want to earn money through day trading, right from the start you will need to make an informed decision whether you are ready to invest a lot of time and dedication, in order to turn that gambling hobby into a reliable profession.
Comparing day trading to gambling might seem a bit off to you, but in our opinion it relatively accurately illustrates your chances on being profitable in the long-run, if you dont spend enough time to become a good trader who relies on sound fundamental or technical analysis and not just the odds of the price going up or down.
Moreover, if you are an experienced day trader, you might still fall in this trap if you get carried away by the market and deviate from your trading strategy and money management. In addition, if you are one of those thrill seekers, who come to the market just to have some fun at the cost of a predetermined amount of money they knowingly are willing to lose, then by all means, you are welcome. Extra liquidity on the market is always good for the smart traders, who are there to make money. But if you want to become one of those traders, you will need the completely different mindset we already spoke of earlier.
After you have procured the required physical resources and have decided to spend a large part of your life chasing the dream of becoming an accomplished day trader, the next major step is to actually begin trading. This calls for the most important trait a person must develop – discipline.
Being disciplined is what distinguishes a successful trader from a broke ex-trader. Although this quality is something you can work on and substantially improve during your years of trading, many people terminate their trading carriers much earlier.
Disciplined traders have a set number of hours they trade, or look for trades per day. They have set trading systems and money management strategies, which have been thoroughly tested, and are the core of their financial success. Good traders know best that exactly the discipline to stick to your predetermined plan in times where others would panic is what makes them good. Being disciplined also allows you to wait for the good trades, which might come only once per day, or not come at all, and sift them from the losing ones.
Another crucial fact beginners need to understand is that they cannot become successful and rich fast, thus a considerable amount of patience is required. Statistics show that as much as 80% of traders lose their initial capital and quit within the first year. This means that you, like the rest, have a much higher chance of wiping your account, instead of profiting or at least ending the year at breakeven. However, as your experience and confidence grow, you improve your chance of ultimately becoming consistently profitable, thus an initial failure does not mean you should quit trading for good. What is important is to objectively set your goals and not have inadequately high expectations, which will discourage you when they dont get fulfilled.