What is the meaning of day trading?
Before you start to trade, it is important to understand what day trading really means. Day trading just like general trading can be defined as the buying and selling of numerous financial instruments like futures, options, currencies and stocks which will result to profit. Unlike another trading, day trading differs a little in the sense that the trading positions are hardly held overnight.
Initially, day trading was only accessible to financial institutions due to the fact that they had access to the market information and exchanges. With the internet as a recent technology, individual traders can now directly access the market information and exchanges and can make the same trade at a minimum cost.
Day trading is not investing, which is buying a stake in an asset that will generate profit over a period of time. It is important to understand what day trading isn’t. Investors are known for holding assets for years and even decades, the timing is subjective. Many investors are very much concerned about the business they invest in, they scout for companies with huge profits, they pay off debts in due time, they have a huge pipeline of products and they stay away from litigation.
Buying and selling of securities within the same day is another major feature of day trading. In order to take advantage of small price movements in highly liquid stocks or indexes, day traders often use borrowed money. By buying low and selling high, they follow the same wisdom as longer-term investors, but in a short time frame.
For example, a day trader buys a thousand shares of certain stock at 10 in the morning. By 10:15 as the price begins to go up and the trader then sells it. If the stock is up by $0.50 when the trader sells then he or she makes $500 minus a commission. The commission for stock transactions can be in the range of $7 to $27 if the trader is using a popular online trading platform Scottrade which gives the traders the profit of $473 to $493. Taxes also have to be very well considered. When a trader sells an investment he or she has had in less than a year, the profit of the trader will be taxed at the personal gains rate, and this can be as high as 35% .long-term capital gains are not taxed higher than 20%. This makes it so obvious that tax planning is an important part of day trading.
If the profit of the trader is not so much, keep in mind that the day traders can make up to 25 or 30 trades. Day traders generally would not own stocks overnight in order to limit their risk, mainly due to the fact that prices can vary from one day to the next. The market’s volatility is a factor of news, events, and announcements. Traders are therefore advised to be available to respond to a short notice. This is not the case for investors as they can wait for additional information before making a decision. Day traders make decisions in minutes or seconds as they move very fast.
Considering the situation of investing for years and trading in seconds, other investment horizons, and trading types exist. Holding a stake in a commodity or stock for several days can be termed as swing trading while position trading can be referred to as holding a stake in a stock for numerous weeks or months. Day trading is one of the riskiest and controversial trading, with the history we will understand how it infamous reputation came about.
When you decide to start day trading, here are a few questions you should ask yourself. Will this interfere with my day job? Will I get enough sleep? With day trading, you might need to spend most of your time in front of the screen or PC. Position trading and swing trading are alternatives to day trading. You will maintain a particular position for a couple of days or weeks. With this trading, you will not need to spend all day in front of the screen. It will not interfere with your daily activities or job. After the market closes you will need to spend no more than 2 hours managing existing orders and placing new ones.
Things you need to consider before you start day trading
Day trading is one of the most talked about trading today. Some websites don’t find it possible, while many promote it as a means to get rich quickly. Many traders around the world make a living from day trading, either way, there is a truth to the success of day trading. If you are interested in day trading, it is essential that you take note of key points before you start trading in order to know what to expect.
Time Investment
Day trading is not a trade that takes forever to understand, however, you will not get rich overnight by day trading. It is encouraged that you spend at least 6 months to a year to have fully understood the conditions of day trading.
Most new traders have the problem of not practicing for several months before they start to trade. Due to this, they are not aware of how the policy works, and how they need to adapt to the numerous market condition. You will never be successful if you take this route because you tend to abandon the policy and start all over again. To avoid this ensure that you spend every day for six months practicing the specific method of trading. When you abide by this you stand a good chance of success and consistency.
Capital Investment
Different amount of capital is needed for the different market to day trade.
Stocks are very familiar, although they are the most capital intensive. The minimum amount you need to day trade stocks in the U.S is $25,000. You will, however, need more than that to keep your balance above $25,000 to enable you trade. You can begin with as low as $500 to day trade forex.
When trading the popular day trading contract like S & P 500 E-mini, you will want to start with at least $3500 or $7000, but with trading futures, you can open an account with at least $1000 with some brokers.
Predicted Monthly Income
It is advised that only 1% of the account should be risked by new traders. This means that there will be an effect on your overall capital balance if you lose on a trade.
Day traders can look forward to making between 10% and 30% a month by risking 1% per trade. There are months where you can make higher than 30% and also months when you will do really poorly, however it is good to set your average return to 20%. Your monthly income will be based on how much capital you trade, the more capital you trade, the lower and the percentage return. It is easy to make high returns on a few capitals, compared to the same return on low amounts of capital.
For more information on how much you can expect to make day trading, check out; How Much Can I Make Day Trading Futures, Forex, and Stocks.
Be aware that this data is based on confident of the methods of trading and all its conditions. Before you can see the outcome on a monthly basis, you would have spent six months to a year understanding it fully.
Challenges of Consistent And Successful Day Trading
There are many challenges when it comes to day trading. Each trading is most times different; the trading approach that will work well in most market conditions is what is required. However you will not win every day, with an amazing approach you will still lose money between 4 to 5 days in a month; in the long run, you will make profits. Every trader wants to be able to adapt to the market condition which simply means being able to avoid complex systems which contain lots of indicators and requires constant research. A typical example is the use of simple practice action policy if you want to learn how to day trade stocks.
Day traders also have psychological challenges. Because there is no assured pay check this will weigh heavily when bills are due and the trading is not doing well. This can lead to trading mistakes and bad performances.
Invest in personal Training
There is a very short shelf life for software and get rich quick products which promise riches overnight. Unless you know how to make changes to the software, this software will work for a short period of time then stop working. However, it is better to educate yourself rather than buying software products that will fail you.
Ensure that you read books and articles on trading and its principles. Look into getting a mentor whose approach you think would work with your personality. Spend more on your own education rather than trade signals or expensive subscriptions that make you reliant on someone else. It is good that you invest in yourself from the very beginning, this way, irrespective of what happens you will be able to get the job done successfully.
In conclusion, here are the few things to note before you start day trading:
- What is the meaning of “day trading”?
- When day trading, you must reduce your losses.
- Trading is just a part of your money.
- Proper training practice is required for trading.
- There is a variation in the time it takes to trade.
- For day trading stocks, a direct-access broker is needed.
- In day trading, daily money goals are ineffective.
- Day trading does not have to be done every day.