Day trading is a risky method that some people sell as a get-rich-quick scheme to using the stock market. People who understand the stock market could turn day trading into a successful career, but, it’s also easy for people to lose a large amount of money. There are several pros and cons to day trading that people have to know before they dive into this venture, and we’re going to highlight the biggest ones below.
First off, let’s talk about day traders.
Day traders are people who purchase and sell stocks throughout the day with the goal of cashing in and making money on small fluctuations in highly liquid indexes or stock prices. Just like investing, the ideal situation involves buying a stock at a low price and selling it at a high price. However, the timeline gets shortened from years to hours.
Day traders want to make money by successfully making several sales during the same day. So, you could buy 1,000 shares of a particular stock and see the price go up in a half-hour. You could sell those stocks you just bought for a small profit. Each time they make a sale, the person makes the difference minus the commission.
The Biggest Pros And Cons Of Day Trading
There are several benefits of being a day trader if you know what you’re doing and understand the stock market.
Pro One – Instant Results
One of the biggest benefits of day trading is that it’s very fast-paced and you can see instantaneous results. It’s fast enough that you’ll know a few minutes after you purchase your stock whether you made a good choice or not. The trade will either move against you, and you lose, or it’ll move in your direction and allow you to make a profit.
Pro Two – There Is No Overnight Risk Involved
Whatever you manage to make or lose by the end of the day finishes out in your account. So, you get more instant results. You don’t leave any of your trades to change overnight. The market can swing drastically from one point to the other, and you can’t pull out of a trade until the market reopens in the morning.
When you day trade, you pull all of your trades before the market closes, put them in your account, and start with a clean slate right away in the morning. It doesn’t matter how the market fluctuates overnight.
Pro Three – It’s An Adrenaline Rush
The adrenaline is another big perk for day traders. Depending on the size of your account, you could make hundreds or thousands of dollars if you buy the right trade and sell them at the correct time in a matter of minutes. The adrenaline rush can be very addicting when things go your way, and this is what initially draws people in. However, adrenaline can also lead to making costly mistakes, so you do have to be careful.
Pro Four – No Time To Overthink
There is no overthinking in day trading as you get with traditional trading. The markets don’t stop long enough for you to make drawn-out decisions regarding your potential trades. Instead, you have to make split decisions.
The markets can move very quickly, so you have to jump at an opportunity when you see it without thinking about it too much. This is another reason why people tend to flock to this type of trading.
Pro Five – Different Trading Strategies Available
You have several trading strategies available to you when you day trade across the major markets. Some of the most popular techniques people use to day trade include counter-trend trading, breakout trading, and trend-following trading.
You can experiment and see which one works best for you, and it’s possible to incorporate a few different strategies into your trading.
Con One – You May Need $25,000
When you first start day trading, you may have to have $25,000 on hand. Whether or not you do depends on how you want to trade. If you plan on trading options and stocks and you’re trading on a margin account, you will need this money before you start trading.
If you plan on trading using a cash account, this pattern day trading rule won’t apply to you. Some people may not have a problem coming up with this amount, while some people will struggle.
Con Two – Smaller Profits Due To Smaller Stop
Generally speaking, people set up their stop losses differently when they day trade. You’ll usually have smaller stop losses since there is a potential to lose so much due to how fast-paced this trading form is. A smaller stop means that you’ll have smaller profits.
Con Three – Addicting
Day trading can be extremely addictive, and this is especially true if you get on a streak where you’re making profits. You could compare it to a casino game. It’s very easy to make bad decisions and wipe out a huge amount of money, and then you lose more money trying to make the original amount back. This is why you have to be very careful and only trade with what you can afford to lose.
Day trading has huge risks associated with it, but there are also huge profit potentials. If you’re interested in day trading, take your time, learn how to do it properly, and never bet anything you can’t afford to lose.