Back in the day, only a few people could trade. These included financial firms on Wall Street, brokerages, and trading houses. This all changed with the rise of the internet, however. With broadband widely available, brokerages launched online products, ushering in a new era for markets.
Now, there are several platforms to trade on, and a lot more methods to use when approaching a possible play.
Day trading can be an extremely profitable career, as long as you do it correctly. But it can be a little challenging for newcomers– particularly for those who aren’t entirely equipped with a well-planned strategy. It’s fast-paced, and wins are big, and sometimes losses are even bigger.
If you think day trading might be for you, read on.
What is day trading?
Investors who participate in day trading seek to make profits from the small market movements on a daily or weekly basis. When making an investment, the time frame in which the investment is held is often no more than a week or maybe up to a month’s time.
Day traders often use technical analysis to determine the behavior of the market movements and place trades accordingly. Following some of the key information like market trends, price patterns, and resistance/support levels, investors are able to enter the market at times they believe the price is going to react at a certain point, and profit from it.
Other indicators that day traders may use can be economical updates such as company earnings reports, major announcements, etc. and place a trade before the event begins, in efforts of profiting from the market reactions to the economic updates and events.
Day trading is riskier in nature and should be taken with a very cautious approach, only ever risking small portions of your portfolio at a time. A general rule of thumb when day trading the stock market is to never risk more than 1% – 2% of your total portfolio value. If you have $5,000, then you should never risk more than $50 – $100 per trade. This advice lowers your risk of making a wrong decision and losing all your money very quickly.
While you may be risking just 1% – 2% of your portfolio value per trade, you place trades in which you will potentially make twice as much as you risk, or 2% – 4%. The rule of thumb is to place trades that are at least a 1:1 risk reward ratio, or higher, but never lower.
Is it right for you?
Many people look at day trading as a fun and exciting side-gig or even a full-time career. After all, how difficult could it be to buy stocks, wait until they increase by a couple of cents, sell, and repeat the process?
But it’s not that easy.
Many professional money managers and financial consultants avoid day trading, even warning against it, arguing that, in most cases, the benefit does not warrant the gamble. Alternatively, those who do day trade strongly insist there is a lot profit to be made. Day trading successfully is possible, of course, but the success rate is inherently lower because of the intricacy and inherent danger of day trading.
Of course, there are a few things can keep in mind before jumping into the deep end, however.
As an individual investor, you should not be susceptible to emotional and psychological predispositions. Professional traders are typically able to cut these out of their trading techniques, however, when it’s your own cash on the line, it tends to be a different story.
You’ll likewise need to be well-prepared for some of the dangers and hard truths that come with the game.
For instance, you’ll be taking on specialists with substantially more resources than you. These people have access to top tier technology and some of the best connections in the industry, so even if they have a bad day, they’re well-positioned to be prosperous in the end.
Additionally, you’ll have to be able to manage and understand the commissions you’re paying out completely. For example, if you’re making 30 trades daily, these expenses can accumulate remarkably fast.
Lastly, Uncle Sam will take a huge stake in your profits. Day trading income meets the Internal Revenue Service’s definition of a short-term capital gain, so it is taxed as common earnings. This can be a massive issue if you are day trading in addition to other work, as your day trading earnings might potentially catapult you into a higher tax bracket.
With all that in mind, if you are prepared to handle all these challenges, head on out there and discover yourself the ideal platform and start trading! Remember, always do your own research!