Understanding The Risks of Day Trading
Day trading is the buying and selling of certain stocks within a single day. This is a rather "modern" technique of trading although it's been around for about thirty-seven years or so.
All positions are closed usually before the close of trading day because the main goal is basically to be able to profit from the difference between prices for buying and selling. Such a practice makes it highly speculative. Therefore it is no surprise that more than 70% of day traders lose money.
It is important to understand the risks involved in day trading before deciding to take the plunge.Many experienced traders would agree that day trading became popular due to two basic reasons:
- modern technology, which includes the popularity of the internet and access to real-time stocks data;
- the "get rich quick" mentality.
These two very reasons which catapulted day trading into a profitable endeavor for a few are also the same reasons why many more have lost so much money in it. And in order for the newcomer to actually be able to stand a chance in making some money, they will need two additional ingredients:
- knowledge; and
- discipline.
Because of real-time access to stock data through the internet, a lot of scams have surfaced. The scammers will pass around information, usually through email, that a particular issue is about to take off and will encourage those willing to listen to invest in these stocks. Those without any knowledge of what is going on can easily be tempted.
In the end, it is the scammer that makes money because those who bought in would have caused the issue to rise and the scammer will cash in right away. The investors without any knowledge and who may very likely have entered because of the "get rich quick" bug would very likely be left holding an empty bag.
In the scenario above, you can see very well how not having enough knowledge and discipline can burn the inexperienced trader quite quickly. And because it is common for day traders to borrow money to trade, the losses could mount rather rapidly.
Clearly experience plays a big role in day trading. Remember that day trading focuses on short-term trading, in which a trade may last seconds to a few minutes. Traders buy and sell many times in a day and in very high volumes daily, they also receive big discounts from the brokerages. With the right knowledge and following a particular system, this practice can easily be a big profit-maker. But without discipline and knowhow in risk management, it is very easy to lose huge amounts of money too.
