What exactly is “DAY TRADING?” Are you also asking? Okay, let’s find out!
When people hear “day trading,” they think of people trading in and out of the stock market and making millions of dollars. Also, you might have seen an advertisement on day trading courses, software, and other products advising you to quit your job and go into day trading.
Often, many day traders experience losses because they fail to understand the context of day trading, or the odds of success are not just in their favor. Thankfully, you don’t have to worry any further. This article comprehensively explains everything you need to know about Day Trading, including the benefits and associated risks.
Without any further ado, let’s get straight into it!
What Exactly Is Day Trading?
Day trading involves purchasing and selling a security or a financial instrument multiple times within a single trading day. It typically involves accurately taking advantage of small price moves in the trading market. Almost all trading markets support day trading, including the stock, foreign exchange, and crypto markets.
Who Is a Day Trader?
A day trader usually buys and sells stock positions for a little more than they paid within the same day, hoping to get the best profit on each trade.
Day traders are usually sophisticated and well-financed. They use high leverage and short-term trading approaches to take advantage of small price movements in highly liquidity currencies, coins, or stocks.
Also, day traders follow the events that lead to short-term market moves. For example, scheduled notices such as economic figures, commercial earnings, or interest tariffs are subject to market psychology and expectations. So, markets retort when those expectations are cut short or exceeded, especially with unexpected vital moves that can profit day traders.
Additionally, it is essential to know that many day traders borrow money to buy more stock than they can afford, known as using “leverage” or “buying on margin.” It can harm your trades as you may lose all invested capital or become debt.
Benefits Of Day Trading
Day trading has many advantages for people who can manage their emotions and withstand the inherent day-trading pressures. Some of those benefits include:
- Possibility of Huge Profits: Successful day traders are lucrative and yield quick profits within a twinkle of an eye.
- Independence: Many day traders enjoy the freedom of self-employment, working for themselves and not answerable to anyone. They are true entrepreneurs living by their wits and, expectantly, reaping the fruits of their decisions.
- Exultation: There are rare events that can match the feeling that comes with a considerable profit made exclusively through your labors and an iota of good luck.
Risks Of Day Trading
Like every other investment, day trading also comes with its risks. However, unlike purchase-and-hold and growth investment, day trading involves a higher level of uncertainty because of the short time frame accompanying the process. Here are some pitfalls associated with day trading:
- Volatility: Short-term unpredictability is what traders buy; however, forecasts made within a short period have a lower possibility of coming to pass, leading to higher volatility risk levels. At times, the stock market works the same way as betting. For instance, when you bet it will rain in the desert today, you might be wrong about the possibility of being right when you bet that rain will fall in the desert in the next five years. Predicting where prices will go within an hour or minutes is almost impossible.
- Higher Tax Burden: Returns on investments obtained and apprehended for more than a year are taxed at a lesser capital gains tax rate, while returns on capital held below a year are levied at the same rate as mere income. Therefore, short-term returns from day trades undergo a higher tax rate than long-term investments.
- Mental Addiction: Day trading can lead to a psychological addiction. Like gambling, the chance of generating substantial amounts of money quickly results in the urge to continue, whether you’re on the hotline of your luck.
Being addicted to day trading comes with substantial penalties, especially if you’re trading with borrowed margin or a lifetime saving you can’t afford to lose.
What Exactly Is Day Trading?: Final Thoughts
Nowadays, almost everyone wants to become a day trader. Unfortunately, the multiple advertisements on day trading courses aren’t also doing many newbie traders any good. These advertisements create a wrong mentality that day trading is an easy process that results in overnight wealth. In the real sense, being successful with day trading involves lots of capital, commitment, and comprehensive knowledge of what makes the values of financial instruments recede, tide, and flow.
Of course, day trading requires high emotional discipline, stress tolerance, and attention. Therefore, before you begin day trading, research and use your strategies appropriately instead of gambling with your hard-earned money, especially if you find it difficult to control your emotions or have a low-risk tolerance.
So, do you now know what exactly is day trading? Let me know in the comments…