What is day trading and what are the advantages and disadvantages of day trading?

Some traders are new to the trading business. Traders are eager to earn a big chunk of money in a short time.

So for those who are passionate about trading and earning money with their market knowledge, day trading is the best option.

As the name implies, this type of trading only works for a single day. The next day, a new trade is placed.

In earlier times, only those people who could do day trading were associated with big financial organizations or trading companies.

But with the advancement of the internet, it has become relatively easy for an individual to do day trading. It is also known as active trading, as one has to close his position by the end of the day.

Day trading is best for the passionate traders who do trading, not for fun but for their livelihood.

What is day trading?

Day trading is the trading technique in which a trader invests his capital for a single day in different assets, makes a profit due to market volatility, and closes his position on the same day.

It is also known as active trading, as whatever the losses or the gains, one has to close all the positions by the end of the day.

It involves high leverages, and the trader should be highly disciplined to achieve their goal on a single day.

A day trader must know all the technical indicators and have done fundamental analysis before investing in any commodity or stock. 

Because it becomes quite difficult to change strategy for a day trader as the time of trading is just a single day.

A day trader has to be argus-eyed when it comes to any news. As the information directly influences the market sentiments and a day trader can make a profit from even a small fluctuation.

Techniques employed in day trading

  • A day trader places several trades in a highly liquid market & makes small profits from them to collectively gain a large profit. This technique is the scalping technique.
  • The resistance levels have governed the selling and buying of stock and commodities.
  • As the prices move towards their extremes, one can decide whether he wants to buy a commodity or sell a commodity. This is also known as range trading.
  • In this trading method, most of the trade is governed by news and market volatility. As a result, the most liquid market is the most volatile, and the profit is also big.

Advantages and Disadvantages

There are certain pros and cons of being a day trader. Let us discuss them one by one.

Advantages

  • No need to worry about overnight market fluctuations and risks to earnings.
  • Compounding of money is very fast as one can use his money earned on the previous day to invest in a new trade the next day.
  • In cash positions, there are interests awarded to the trader. I.e., one can earn interest if he is closing his position on cash. This interest is available on specific trades, not on all.
  • One can make quick money using leverage. Leverage means one can buy additional shares of a company with a brokerage account. For example, if a brokerage company provides a brokerage of 5:1 and a person has $10,000, then he can buy shares for up to $50.000.
  • Using brokerage in this trading method is extremely dangerous as one may lose all of his money as the share falls.
  • While performing day trading, one need not work for all day. This means if a day trader has achieved what he desired. Then he can take off for the rest of the day.
  • A day trader need not have to own an office; rather, he can work from anywhere in the world and enjoy his trading.

Disadvantages

  • Understanding day trading is a stressful process as it employs a learning curve. Learning takes time, and there is no time in trading.
  • The results that we desired are time-consuming.
  • A thorough analysis is needed before investing in any trade as it might not result in the desired output at the end of the day.
  • One cannot control his emotion when his profile suffers a loss. As the price fluctuates, the feelings also vary as doubts about decisions.
  • While making multiple trades in a single day, the trader must be very disciplined. So he has to monitor all of them and make a trading plan accordingly. If the trades are not aligned with the trading rules that the trader predefined, then the loss is confirmed.
  • When a day trader plays high-frequency trading, then he is susceptible to losses.  
  • In this trading method, a trader can lose all of his money in a fraction of seconds if he does not employ any risk management plan like stop-loss orders.

Bottom line

Day trading involves all the trades to be performed on a single day. So one should be very careful in placing the right trade because one wrong decision can ruin all of your trading careers.

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