If you have seen a trading guru on social media, they likely have spoken about their positive experience with day trading. As their main goal is trying to sell you a course of trading signals, they likely misrepresent the reality of day trading. Take a look at everything you need to know about day trading before deciding whether to try it out for yourself.
What Is Day Trading?
Day trading is when an investor buys and sells a security within a day. This can take many forms, such as high-frequency trading. This is when securities are bought and sold within seconds. Day trading can be a profitable way to trade the up and down movements during a trading session. It can be difficult for novice traders to develop a strategy and become profitable.
Is Day Trading Profitable?
Day trading profits come from the golden rule of investing: Buy low and sell high. If you can do this within a day, you will make a profit. The opportunities to make a profit exist every day, and it is up to the trader to find and capitalize on those opportunities. This is not an easy task. One study found that only 13% of day traders will make a profit over the course of a year, and 90% of day traders will lose their initial investments within six months. Profits are hard to come by in day trading.
Pros of Day Trading
While day trading might be difficult and risky, there are still a large number of pros to consider
Profit Potential
Day trading has the highest profit potential of all trading strategies. Because day traders open and close the most amount of trades, it allows them to capitalize on all movements of a security. This differs from taking strictly long or short positions and increases profit potential.
Variety of Trading Strategies
Day trading also allows traders to use a variety of strategies to earn a profit. Outside of basic long and short positions, traders can rely on other factors such as technical analysis, volatility trading and arbitrage.
Flexibility
One of the larger benefits of day trading as a career is the flexibility it provides. Some financial markets, such as cryptocurrency, are open 24/7. With electronic trading, day traders also can open and close positions anywhere with Wi-Fi. This allows for flexibility in terms of working hours and location.
No Overnight Risk
If you hold positions overnight, there is a risk that it could move sharply overnight or in premarket trading. With day trading, this is no longer a risk, as all positions are opened and closed within the day. While day trading is still risky, this is one risk that is not present for day traders.
Learning Opportunity
Day trading allows traders to use a variety of strategies. Each of these strategies is unique and provides learning opportunities. Each day also brings about new market conditions, providing more learning opportunities. Overall, day traders are constantly learning and acquiring new skills.
Cons of Day Trading
Though day trading may sound great after seeing the pros, it is also important to understand the cons.
Risk and Volatility
Though day trading has high-profit potential, it’s also risky. Prices can drastically change throughout the day. Many day traders also use leverage on their positions, which can heighten volatility and risk.
Emotional Stress
Day trading allows for flexibility but not without a cost. Day trading is extremely stressful and can take a psychological toll on anyone. This is because of the constant decisio- making and unpredictability of the markets.
Steep Learning Curve
While day trading has been successful for some professionals, it has a steep learning curve. It takes a substantial amount of time and effort to acquire the knowledge and skills needed to turn a profit. Because of this, it is unlikely that a novice profit from the beginning.
Margin Risk
Many day traders use leverage on their positions. If a levered trade goes too far in the wrong direction, a trader may experience a margin call. This is when the trader does not have a sufficient level of capital to cover the amount of leverage and the broker requires more money or will automatically close out the position.
Time Sensitive
Day trades can take place in minutes, seconds or milliseconds. Trades are made quickly, and day traders must constantly monitor their open positions. This adds more stress and can make it difficult to capture profits.
Things to Consider With Day Trading
Now that you have a basic idea of what day trading looks like, here are some important factors to consider before jumping in:
- Time commitment: Day trading is a large time commitment. If you want to improve, you must put in the necessary time to get better and learn more about the practice. This can cut into leisure and career time.
- Risk tolerance: Before day trading, you should look at your financial situation and goals to determine whether you are OK with the heightened risk.
- Capital requirements: Day trading also requires a significant amount of capital to begin trading. This allows traders to receive margin and leverage as well as cover potential losses.
Alternatives to Day Trading
If you think day trading is not for you but you still want to be involved in financial markets, here are some alternatives:
Long-Term Investing
If you put your money into a stock market index and let it sit for a long time, there is a chance it will outperform day trading. This reduces stress because there is no active management. It also allows for compounding returns.
Swing Trading
Swing trading is a middle ground between day trading and long-term investing. Swing traders may hold positions for a few days or weeks and look to capitalize on momentum and news events. This can be less risky than day trading while still providing the ability to make investment decisions.
Robo-Advisers
Robo-advisers are a recent trend. The artificial intelligence programs allow for passive investing and portfolio management. This is similar to long-term investing, but a computer program makes investment decisions for you.
Is Day Trading for You?
After looking at some of the pros and cons of day trading as well as some alternatives, you likely have a solid idea of what day trading would look like for you. Before making a decision, it is important to review your financial situation and weigh the risks and rewards of day trading.
Frequently Asked Questions
Can I day trade on Robinhood Markets Inc.?
Yes, you can day trade on Robinhood. However, you can only make three day trades per week unless you have more than $25,000 in your account.
How do I become a day trader?
To become a day trader, you just need to sign up with a brokerage and start trading.
How much money should I start day trading with?
To avoid pattern-day-trader rules, you need $25,000. But you can start with any amount.
About Caden Pok
Caden has been involved with crypto since 2018, when he began investing, trading, and mining tokens. He took part in undergraduate research studying cryptoeconomics at the University of Michigan, where he will graduate Phi Beta Kappa with a bachelor’s in economics in 2025. He is experienced with DeFi technology and multiple blockchains, currently investing in Ethereum and Bitcoin.