Day trading is something that we may have heard of but do not really know much about. Many of us associate it with online scam websites or with high risk trading. This is partly right and it is wise to be wary of scam sites in all financial areas, but there is a lot more to day trading than this.
What is day trading
Day trading is when a security is bought and then sold again within the same day. This can refer to the foreign exchange markets but is more often associated with the stock market. Most day traders have a lot of money to trade and they know what they are doing. They try to predict short term movements and buy and sell accordingly. It is thought that they are actually critical in the stock market as they provide a lot of its liquidity as well as keeping it running efficiently.
The profit potential is actually very small. A lot of online scams will claim that there are huge profits to be made in a very short space of time but professional traders know that this is not the case. Some of them will make a living out of it but they are very experienced and still understand that they are taking big risks. This is the reason why a financial advisor would nroally tell you not to use this type of trading.
What makes successful day traders?
Those that make day trading a success are experts who have a really good knowledge of the market that they are trading in. They also trade with what they call risk capital, which is money that they can afford to lose. This means that they will not make themselves bankrupt in one day but also means that if they do lose it, they will not get emotional about it. You do need big sums of money to make money though because the price movements are so small. This of course means that you are taking a big risk. These traders also have specific strategies that they try out until they find one which will work for them and enable them to make more profit than loss. They also need the self-discipline to stick with the strategy that they have decided is the best rather than being tempted to try something else which looks like it could be better and end up losing out.
Most day traders that so it for a living actually work for larger companies. This is how they have the large sums of money available to trade and they also have analytical software easy access to a trading desk and things like this with the average person does not have. They will use thigs like news events to predict market changes and try to make trades before others also get the idea and therefore they profit from it.
Should I try day trading?
From the above you can see that you need to have a lot of knowledge in order to succeed at day trading. It is something which is very specialist and risky which is why financial advisors do not deal with it. If you do want to try, then it would be best to do a lot of learning first. Find out all about it and how it works, follow trends in the market that you want to trade in. It can be wise to do virtual trading for a long time while you are learning, so each day take a note of what you would trade and at what price and then when you would sell and see whether you could make profit. Of course, how you trade is important as you have to pay to make trades generally and you will need to make sure that your profit is higher than these fees. You will also have to have a lot of money available and money that you can afford to lose. So this has to be money that you do not need to live off or to pay for things.
If it is seething that you have always wanted to have a go at, then you may just have to do it. If so, do be careful and make sure that you spend some time putting aside some money that you can afford to lose in doing this. Also take time doing research. You have to remember that it will takes years for someone to have the right strategy to profit from this sort of trading, therefore you may want to spend this amount of time learning as well. An even safer option could be to learn all about it and then work for a company doing the job so that it is their money that you are risking rather than your own.
Hopefully you can see that unless you are experienced it is a big gamble. You might be better, if you have money that you can afford to lose, to do something else with it. If you do not like risks then it will not be for you at all. If you are happy with some risk, then you may be better in buying stocks over a longer time. As the stock market fluctuates all of the time trading over a long period with smooth out those fluctuations and give you a better chance of making a profit. If you do not like risk or do not have money that you are prepared to lose then it is best to avoid all types of trading. Savings accounts and bonds are much more secure and you will get the money back and hopefully make some interest as well. If you do like big risks, then it could be something that will suit you but it is wise to make sure that you have done a lot of preparation and research first. Talk to a lot of people, read everything you can about it, spend years practising and imagining what you might do until you feel that you have the necessary skills to have a go. Do ensure that you have the self-discipline though to apply what you have learned and to only use money that you can afford to lose.