Day trading is an investment technique where investors buy and sell quickly, usually over the course of a single trading day, rather than holding on to their investments for long periods of time. Day traders use methods that are dramatically different from those used by other investors, so the advantages and disadvantages of day trading are also unusual. It’s a technique that certainly deserves a place in the investor’s book of tricks, but it’s also important to understand the risks and rewards of day trading before taking the plunge and trying it out.
Speed is the single most defining feature of day trading, and it’s hard to say if it is a plus or a minus. Gains come quickly when a day trader is successful, and they can reinvest those gains very quickly. That gives day traders a way to expand their investments quickly, so they can make much larger profits than any other type of investor in a short period of time.
The reverse is also true. Day traders who make a loss can lose a fortune just as quickly as successful traders can win one. Many day traders use margin buying, which is investing with borrowed money. That makes the potential for sudden losses even bigger, although is also amplifies the profits. This factor means that a good day trader must be able to deal with risk and cope with sudden losses without giving up or panicking.
Day traders tend to be very independent people. Most of them are self-employed, so they don’t need to take orders from anyone else, and all of their profits and losses are their own responsibility.
This is a mixed blessing. On one hand, day trading is perfect for people who want to be their own boss and avoid working on a team. On the other hand, not having a team also means lacking a strong support structure. Day traders need to find investment capital on their own and handle all of their own research. If they take a loss, they don’t have support from a company that can cushion the blow to their own bank account. It’s possible for day traders to work together to help deal with those drawbacks, but that means giving up some of their independence.
Thrills and Addiction
Nobody can deny that day trading is an exciting profession. It offers an emotional roller coaster of rapid gains and sudden losses, with constant opportunities to assess new information and make meaningful choices. It combines all of the thrills of gambling with significantly more opportunities to tilt the odds in your own favor. It can be stressful, but success offers immediate gratification and a fulfilling sense of victory.
Like gambling, day trading can also be addictive. People who get used to that life of excitement can start to crave it, and that can lead to poor business decisions. Those poor decisions can cause losses and a downward spiral. Successful day traders are the ones who thrive on thrills but still learn enough self-control to set them aside and wait for the right moment to buy or sell. Striking that balance is difficult, but people who do it can find themselves with a very rewarding profession.
Like most professions, day trading offers a variety of mixed blessings. It also offers a clear benefit, in that day traders know the length of their workday and can stop thinking about their investments after it ends.
People who make long-term investments often find themselves worry about the state of their portfolio. Day traders don’t have any outstanding investments at the end of the day, so they can go sleep at night without worry about how things will change before the stock exchange opens the next day. While nobody can say that day trading is a stress-free profession, it does mean that their stress is confined to the workplace, which is an advantage that most other investors do not share.
There was a time when investors needed to be at the stock exchange to buy and sell, but that time has passed. Modern day traders can work anywhere that has a fast Internet connection. Plenty of them do it from home, but others prefer to do their work on the beach, in a park, or anywhere else that has a good wireless connection.
The Final Tally
Day trading is exciting, convenient, and has the potential to make money fast. It can also be addictive and mistakes tend to be expensive. Every investor needs to decide for themselves if the benefits outweigh the drawbacks. Traders that love their independence and love working under pressure will often find that they do, but conservative investors may want to look into other techniques.