Day trading has become very popular over the last decade. Many people are now using day trading as their primary investment strategy. Is it really worth it? What are some of the pros and cons of day trading?

In today's post I will be going through what exactly day trading is. I will also discuss why it differs from typical mid to long term investing strategies and other useful bit of information I think you need to know.

So What Is Day Trading?

Day trading is a form of short term investing where traders try to profit from price movements of a market asset within a single day. Traders usually trade stocks or commodities at specific times during the day. The goal is to make profits from minute-by-minute changes in prices.

Day trading offers several advantages over other forms of investing. For example, it allows investors to take advantage of trends without having to wait months to see them play out. In addition, day trading (if done correctly) can result in full time incomes within a couple of years instead of a decade plus.

There are also many pitfalls to day trading such as high risk, lack of diversification, limited liquidity, and poor execution. These risks may not seem like much when compared with traditional investments but they can easily wipe away your gains if you aren't careful. I cover why day trading is not easy later in this article.

Often it takes people a long time before they can become profitable successful day traders. I discuss further on about using a day trading strategy along with disciple and plenty of practice can take you from being someone who knows nothing about the market to an experienced day trader.

Most of the lessons you learn on your journey through trading or for anything in the stock market will come from actual practice and not just reading a blog post from this. That's why I want you to understand that you won't simply be able to read this article and suddenly know how to continuously execute profitable trades.

How to Day Trade

The Basic Concept

So the overall concept to day trade is pretty simple. It involves purchasing stock assets and within a short period of time they sell the stock hoping for a small profit. The time period of the purchase (or trade) can be 5 minutes, 30 minutes or a few hours but is typically no more than single trading session in a day. Hence the name, day trading.

This simple description of course has a lot more steps. For example a day trader will often analyse charts in the form of technical analysis to decide where to enter and where to exit there trades. There are many different ways people carry out technical analysis and many different trading strategies. I go over some more strategies in the next section.

Whichever strategy is chosen often will have the same core principles. You are not hoping to win every single trade (although that would be nice). You are in fact hoping that over the long term, you win more than you lose. This may mean that you win 60% of your trades or may even mean you lose more than you win but when you win, you win a lot more than when you lose. 

Understanding this fact that you WILL lose trades no matter how much of a pro you are will give you a much better chance. This will allow you to trade with a strategy, accept losses when they happen, and make money over the long term. 

Most people beginning to day trade end up giving up because they lose 1 or 2 trades in a row yet this is completely normal. This is why it is highly recommended that when you are learning to trade, that you start with a fake money practice account. This will allow you to not worry about the losses, get used to a strategy and gain confidence before you trade with real money.

Strategies

So there are many different day trading strategies out there. Many I have never heard of and probably never will. New are created all the time and in fact you could attempt making your own strategy if you desired.

A strategy usually consists of two parts: entry and exit. Entry means entering or buying into a position at a certain price and then waiting until the price moves in your favour before exiting the position. Exit on the other hand means selling from a position at a certain point in time.

These entry and exit points are often determined through a mix of technical analysis and pattern recognition on the stock charts. Some people may also other external factors relating to the companies they trade or economic reports.

If you want examples of day trading strategies then search on YouTube. There are an endless sea of day trading strategies which exist that you can test out and I will soon go over how these day trading strategies can be tested.

Practice With Back Testing

Back Testing is the holy grail of day trading. Without back testing any strategy you wanted to test would have to be done in real time which would take a long time if you were looking for certain criteria to enter your trades.

Back testing is essentially a process where you look over historic price charts to search for your strategy criteria and check if the strategy will be profitable over the long term. This process can be done manually or can be automated slightly with some handy software.

For example, Trading View (https://www.tradingview.com/) has a replay feature which lets you set the time back to any period assuming there is data for the chart and play it out as if you were seeing it for the first time. This lets you have a feel for what it would actually be like during a live trade which makes your testing a lot more reliable.

The replay feature in Trading View can be played and many different speeds so you can speed through areas where your setup is not close or even to play out strategies that may take a few hours per trade within a few minutes per trade.

Back tests often cover many tests of the same criteria. Typically you would want to go for 100+ trades to give a good idea of the win ratio and return over time.

Day Trading is Not Easy

As mentioned earlier, most new traders fail because they don't know what they are doing. The reason for this is that day trading requires a high level of discipline and patience. If you do not have either of those things then you should not day trade .

It takes practice and experience to get better at day trading but it is definitely possible to become a successful trader. It just takes dedication and hard work.

Some people who try to day trade end up losing money because they don't understand the market and their emotions make them lose focus. For example, when you see a big move happening in a stock you might think "I'm going to buy now" and miss the fact that the price has already moved too far away from your entry point.

You could also get caught up in the excitement of making a profit and forget about the risk of loss. These are all common mistakes made by new traders.

More often than not, the biggest risk to a traders success is themselves. If the trader doesn't take control of there emotions and stick to pre-determined plans then the trader is destined to fail from the start. This is why back testing is so crucial to a traders arsenal.

Summary

In summary, day trading is a great way to generate income while having fun. However, it is important to note that day trading isn't easy. To succeed you need to follow a plan, execute your plan perfectly, and stay disciplined. It may even take multiple years before you reach profitability.

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Thanks for Reading

Disclaimer: I am not a financial advisor nor am I giving financial advice. I am sharing my opinion only. Please consult with a professional financial adviser before investing. 

FAQ

Should You Start Day Trading?

As mentioned above, day trading as a career can be very difficult and quite challenging.6 First, you need to come in with some knowledge of the trading world and have a good idea of your risk tolerance , capital, and goals.

Day trading is also a career that requires a lot of time. If you want to perfect your strategies after you've practiced, of course and make money, then you'll have to devote a lot of time to it. This isn't something that you can do part time or whenever you get the urge. You have to be fully invested in it.

Source: (investopedia.com)

What if I get a margin call?

If a pattern day trader exceeds the day-trading buying power limitation, a firm will issue a day-trading margin call, after which the pattern day trader will then have, at most, five business days to deposit funds to meet the call. Until the margin call is met, the account will be restricted to a day-trading buying power of only two times maintenance margin excess based on the customer's daily total trading commitment. If the day-trading margin call is not met by the deadline, the account will be further restricted to trading only on a cash available basis for 90 days, or until the call is met.

Source: (finra.org)

Why is day trading harder than passive investing?

Retail day traders are competing with professionals. Pros know the tricks and traps. They have expensive trading technology, data subscriptions and personal connections. They’re perfectly outfitted to succeed, and even then they often fail. Among these pros are high-frequency traders, who are looking to skim pennies or fractions of pennies — the day trader’s profit — off every trade. It’s a crowded field, and the pros love to have inexperienced investors join the fray. That helps them profit.

Source: (nerdwallet.com)

Can I make money day trading?

Yes, day traders can make money by taking small and frequent profits. How much they can profit varies drastically depending on their strategy, available capital and risk management plan.

Source: (ig.com)