Market Overview

Should I Day Trade?

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Should I Day Trade?

The 2020 stock market volatility has brought a whole new generation to Wall Street. Popular trading apps like Robinhood have reported surges in new accounts opened by first-time millennial and Gen Z investors, many of whom are trying their hand at day trading.

Day trading can be extremely fun and profitable. But it's also riskier and more difficult than many investing novices understand.

What Is Day Trading? Day trading is the act of buying and selling stocks on a daily basis to profit off of short-term fluctuations in share prices.

Day trading is often contrasted with long-term investing, which involves buying a stock, ignoring the daily volatility and holding onto it for months or years with the hope that the company's underlying business will eventually lead to a higher market valuation.

Day traders often identify stocks that have bullish or bearish momentum and attempt to trade them based on technical analysis alone. Technical day traders look at a stock’s chart for patterns, formations, trends or other signals potentially indicating where a stock is likely to trade next.

Scalpers are day traders that buy and sell stocks within seconds, looking to capitalize on very small changes in stock price. Scalpers rarely make large gains on any one trade and instead rely on quantity over quality.

Swing traders identify slightly longer-term trends that play out over a matter of a few days or weeks.

Related Link: Barstool's Dave Portnoy Perfectly Captures Day Trading This Market (Video)

Does Day Trading Work? Plenty of professional day traders who work for large financial institutions, so day trading clearly works when done properly. Yet many of these traders have years of education and experience, and they have massive amounts of tools and resources that aren’t available to the average retail trader.

The lack of experience and resources is likely the major reason why about 80% of day traders lose money, according to Etoro.

Owen Murray, director of investments at Horizon Advisors, has said there are additional psychological risks for new day traders jumping into a bull market like the one that has occurred since the market bottom in March 2020.

“Day trading typically becomes very popular during bull markets, because on balance, stocks are mostly moving higher and it is easier to make profits," Murray said.

"But in most cases, investors are better served by creating a well-balanced, long-term portfolio, rather than racking up trading expenses and costly short-term capital gains.”

The SPDR S&P 500 ETF Trust (NYSE: SPY) is up nearly 60% since March lows, so most traders who have bought and sold any stocks along the way have turned a profit in that period.

Benzinga’s Take: Day trading requires a high-level skill set that takes years to acquire and hone. Nobody would reasonably expect to learn how to be a good lawyer or engineer in a couple of weeks, so there’s no reason to expect to be a skilled day trader right off the bat.

Most traders lose money at first, but the longer you stick with it and dedicate yourself to learning the craft, the higher your chances of success.

 

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