Day trading is an exciting idea for a lot of people. But what is it exactly and should you consider it as a way to make money? Though the prospect of trading from home seems exciting to many, there are some things to keep in mind before you start.
This article will help you understand what day trading is and how it works. Read it to decide if this activity is right specifically for you.
What Is Day Trading: Definition
Ok, let’s explain the main terms. What is day trading? It means that you buy and sell assets within a short time frame. A typical time frame is 1 day. During this interval, you seek to make micro profits, playing on tiny price fluctuations. These small gains can add up to a tidy sum at the end of the day. Unless they don’t.
Day traders normally operate with stocks, options, fiat, and digital currencies and various futures contracts.
This activity used to be for professionals only. Now, it is growing in popularity, as many people love the idea of quitting their full-time jobs and become traders. But it’s not as easy as it looks to an enthusiastic beginner. Day trading has some risks specific to this particular type of trading. Besides, it’s highly competitive.
To make some profit in this environment, it’s not enough to spend a couple of hours a day looking at the monitor. Rather, most successful traders see it as a full-time job. They manage to make money just because they constantly practice and learn from their mistakes. These people are rather few, but you can become one of them – there’s nothing impossible!
What Is Day Trading And How It Works
Ok, we have the question “What is day trading?” briefly answered. If you keep reading, you are not afraid to try it and want to know how day trading works.
The first thing you should be ready for is high volatility. As we said, day traders are short-term players. The price of assets may bounce around a lot during a day. It may rise or fall because of the demand for this asset increases or decreases. This demand depends, in its turn, on many factors. For example, there may be news affecting the company in a positive or negative way. Or the company reports its earnings, and we see they are very small or non-existent. It means its stocks are not as valuable as they seemed, and people start to get rid of them.
Day traders are people who make profits on these fluctuations. Therefore, they love the assets that bounce around a lot for any possible cause. Or for no apparent reason.
Sometimes day traders buy the same stock many times a day, trying to profit from the changing sentiments, hopes, and expectations. No matter the strategy, they always expect their stocks to be volatile.
What Is Day Trading: Challenges
What is day trading major challenge for a beginner? Basically, they are two:
- You are competing with professionals with rich experience. Unlike you, these traders know a lot of tricks and have a ‘professional insight’. They have spent years on the stock market, analyzing data and trends. These pros are used to playing in a very crowded field, and they love it when new people join the game. Beginners, who lack trading experience, are likely to lose money, meaning someone will grab it.
- Day trading is stressful. Therefore, it’s difficult. Many traders, especially beginners, tend to sell ‘winners’ too early and hold ‘losers’ for too long. Also, they may be afraid to buy an asset that is declining – what if it goes on down? Sometimes, in order to succeed, you have to act against your instincts and ignore your fears.
Day Trading: Taxation issues
Besides, if you manage to become a successful day trader, don’t forget about the taxes you have to pay. In some cases, taxation issues are rather complicated. For instance, the IRS may see the money a day trader makes as ‘earned income, ‘investment income’ or ‘capital gains’. It means different tax rates and conditions.
As for the UK, taxation depends on the legal status of the trader. For example, ‘self-employed’ and ‘private’ investors have their gains and losses taxed differently.
Is Day Trading Right For You?
Can you make money day trading? It depends. Let’s see what rules you have to follow to become a shark in this pond.
Rule 1: Learn And Practice
A good day trader should master all the theoretical tools that help them assess the situation on the market. Learn how to read trading charts. Have an idea of what market cap and other important metrics tell you. Follow the price movements and try to understand what stands behind them.
It’s highly recommended to get some trading education before you start investing any money. You can take a course, or read a book, or a dozen of articles to understand the basics.
Rule 2: Choose a suitable brokerage
Choosing a suitable brokerage/exchange is very important. Say, if a platform features high transaction fees, your day trading activity will probably make little sense there. Another thing to pay attention to is the set of tools the brokerage provides.
One of them is an opportunity to open a practice account. It is a special simulator allowing to make hypothetical trades with test money and thus safely master the main techniques.
Some popular crypto exchanges recommended for day trading are:
Rule 3: Invest In a Suitable Hard- And Software
First of all, make sure you have a high-speed Internet connection and a powerful PC. Besides, install the software that will provide you real-time trading data. When your success depends on small moves, keeping track of them is essential.
If you have more than one monitor, it will make things more convenient. You will be able to display several charts on them and thus have a detailed picture in front of you.
Rule 4: Have a System
It’s better to stick to a specific system you feel comfortable with, rather than spreading yourself too thin. Such an approach helps us concentrate on one strategy and learn it in depth. You should be competent in something. Playing randomly and trying to grasp every opportunity will lead you nowhere.
Rule 5: Stop ‘Emotional Trading’
You have mastered all the necessary trading tools and taken a course? You may still be losing money due to the so-called emotional trading. Experts warn: some subconscious psychological patterns ruin our ability to use the opportunities the market offers.
A good example of such a pattern is revenge trading. When you have just suffered a major loss you become angry and frustrated. As a result, you rush back in, trying to get on top. Most likely, it revenge trading will lead to losing even more. The right thing to do would be to take a break and reconsider your strategy.
Another bad practice is impulse trading. For example, you see the price suddenly goes up or down. You feel a strong urge to buy or sell the asset and follow it without considering the key factors. Impulse trading is harmful as you don’t analyze the situation and don’t follow your method. Instead, you let your fear or greed guide you.
Therefore, if you want to be a successful day trader, learn how to control your impulses. They may wipe out your account in no time.
Day trading may be a profitable activity if you can concentrate on details, have enough patience, can handle stress and are ready to learn. If you feel like this drama is not for you, look for an alternative.