Day trading is a highly stressful and exciting career that can be financially lucrative or a financial disaster. While there are many highs and lows in day trading, it is safe to say that one thing -- all day traders will tell you is that there is no middle ground when it comes to the success and failure of day traders. Stress is high and doesn’t go down if you are making money, and if you are not making money, the high stress levels will only last a short time as you will not be a day trader for long.
Day trading is fast paced and instead of looking for stocks that are good long term investments that can return 10% a year you are looking for a stock that is "moving" that you can get in and out with as little as a ½ a point move on the stock. As opposed to long term investing when your time horizon is years, the time that you own a stock when you are day trading can be as little as minutes and can on occasion extend to an hour but rarely any longer than that.
So how does a successful day trader make so much money if they are just "taking" such small gains on stocks? Day traders generally will trade on margin, which means they are borrowing money in order to double the buying power of their investment. So a $10,000 brokerage account can purchase approximately $20,000 in stocks when purchased on margin. Not only are day traders looking for small movies to make money, they are looking for a lot of small moves to make money. Day traders can be in and out of many, many trades during the day whether they are winning all of them or not. High volume and small profits per trade are the nature of the day trader.
Before you get into day trading, here are some suggestions:
- Practice First – technology allows you to run practice accounts as opposed to just learning by losing money. It is better to spend a month practicing than it is to spend the first month losing all your money
- Don’t Fall in Love with a Stock – day traders trade, they don’t care about the specific underlying security. Before you trade have your upside price and your downside price and act on them and move on.
- Day trading is expensive – if you are trading at a firm then there are space costs and training costs and if you are trading at home there is equipment and service costs. Also, with that many trades, there are heavy commission costs.
- Understand how margin works – while margin accounts allow you to compound your profits it also allows you to lose your money faster. Understand the ramifications of a stock decline on your margin account.
- Don’t believe in easy profits, hot tips or sure things ... there is no such thing.
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Day trading is not an easy day job but it can be lucrative and extremely satisfying. Before you make the move to get into day trading, make sure you have the personal makeup to handle such an intense career by speaking to others who have done it successfully and unsuccessfully.
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