Key TAKEAWAYS
Key TAKEAWAYS
While day trading is something that is catching a lot of eyes, there are certain things aspiring day traders keep asking. Without the knowledge of the right basics, it is difficult to traverse the right path in the career of day trading.
Newbies have difficulty forming a clear understanding of day trading. There are some basic questions that a person aspiring to be a day trader has. We’ve tried to discuss it in detail to help you out!
Is there any prerequisite to becoming a day trader?
No special qualification is required to become a day trader. Day traders are classified based on their trading frequency and are subjected to margin and capital maintenance requirements. Moreover, the price action of a stock is of considerable importance to a day trader, unlike the investors who need to be equipped with the data to predict the long term potential of a company’s stocks. Deciding to become a day trader wouldn’t require any specific skills at the start. However, being a successful day trader requires more than learning new skills and implementing them.
Who is a Day Trader? A day trader is someone who capitalizes by carrying out long and short volume trades on the fluctuations in the market price action. When there’s temporary inefficiency in the demand and supply, it leads to the fluctuation in market prices and it’s the point that benefits a day trading to create wealth. They carry out intraday strategies that can help them to generate profits from holding a position for some time. Day traders generally buy and sell a security within a single day.
Is there any prerequisite to becoming a day trader? No special qualification is required to become a day trader. Day traders are classified based on their trading frequency and are subjected to margin and capital maintenance requirements. Moreover, the price action of a stock is of considerable importance to a day trader, unlike the investors who need to be equipped with the data to predict the long term potential of a company’s stocks. Deciding to become a day trader wouldn’t require any specific skills at the start. However, being a successful day trader requires more than learning new skills and implementing them.
What does a day trader do? Day traders generally make transactions for stocks, commodities, currencies, and futures and typically hold positions ranging from few minutes to few hours before selling them. A day trader doesn’t hold any position overnight. They close all the trades before the end of the day as the goal remains to benefit from the small price fluctuations.
To take out maximum benefit from the trades, day traders often amplifies leverages which can also lead to amplification of losses on some occasions.
A successful trader has thorough knowledge, experience, and the right mindset. A trader employs various techniques to make a trading decision. Some traders rely on the information provided by technical software for decision making while some rely on their instinct.
The most concerning things for a day trader are average day range and price volatility. To profit from the security, a sufficient price movement is necessary. A day trader has to look for a required volume and liquidity to profit from small price fluctuation as a large capital is required for the same.
TECHNIQUES OF DAY TRADING:
Day traders employ the use of some techniques to benefit from the market inefficiencies. Most of the day traders are attuned to events that are bound to cause short-term fluctuations in the market. Some of the popular techniques are trading based on news, scheduled announcements that are expected to influence market psychology and can benefit the traders.
Another technique that is immensely used by day traders is ‘fading the gap’. This technique works well when the price of a security at the opening varies from the closing on the previous day. If traders expect that the market is going to be up, they put their money on the securities that are highly expected to show strength. In case of a market trend going down, traders sell securities that can exhibit weakness with a falling market.
As experience is the key to judgment for making a decision, most of the aspiring day traders practice day trading on simulated platforms for several months before they make an actual trade in the real market.
Day trading is a field where either a trader works individually or with an organization; the trade is done as a hobby or for a living but what seems common in both is the characteristics that bring them success.
For pursuing any career, some characteristics are prerequisites, and here are some for a successful day trader:
Market’s knowledge & experience: Knowledge is the key. Chart reading and technical analysis are prerequisites and making a transaction without understanding a market can often bring loss. However, only understanding is not sufficient here to ensure your success in day trading; experience is also required. Before working for your hand on day trading, it’s important to understand the in and out of your financial security and its working trend in the market.
Large Capital: If you are looking at day trading as something to make you large sums of money; you need to make sure that you have large capital with you that you can put at risk. Day trader only uses a risk capital which they can lose without getting much affected financially and emotionally. Large capital on small fluctuation can create large profits and minimize losses. However, a little investment can only create little money for you.
Strategy: Creating the right strategy is important to get success in day trading!
Strategies such as swing trading, trading news, arbitrage, and acquisitions are used by day traders. To get an edge over the rest of the market, day traders stick to their own chosen strategies and refine them until they give consistent results with minimum losses.
Discipline: A good and refined strategy can’t help you out if you are not disciplined with what you do. There are instances when day traders lose money just because they fail to meet the criteria set only by them.
To create profits, day traders rely on the volatile nature of the market and highly volatile stocks are lucrative for a trader as they move throughout the day. To earn considerable profits and decreasing the chances of losses, sticking to disciplined trading is vital.
DAY TRADING: PROS & CONS
The biggest benefit of day trading remains to avoid the ‘overnight risk’ meaning that the securities held by the day traders are not subjected to market risks after the market closes as traders do not hold any position overnight. Closing a trade before the end of the day allows day traders to avoid the financial risk that can occur due to various factors.
There are several other advantages that day trading offers including using stop-loss orders, increases access to margins, and so on.
On one hand, there are plenty of pros that day trading can offer but on the other, there are few cons associated with it as well.
Let’s discuss some of them in detail.
Pros:
Cons:
How much money does a day trader make?
This one question is the most asked but remains the most uncertain one to answer. Depending upon the trading strategies, available capital, and practices of risk management, the earnings of day traders can vary. According to research carried out by the University of California, most of the day trades make speculations actively that make them lose money. Moreover, day traders spend a lot of money on brokerage fees as well. Therefore, it becomes important to choose the right broker along with a working trading strategy while working on risk management.
Professionals suggest that a day trader should risk not more than 1% of their portfolio. Risk management involves not allow a few trades to wipe you out of the game but to take you on a long journey of day trading. Sticking to a 1% strategy can take time but can help a day trader to minimize the losses up to 1% and increase gains by 1.5%.
How to start a career in day trading?
Unlike investing in which someone can invest their money for months and years, day trading involves following some rules that are set by government authorities. Traders who trade frequently are required to keep a marginal amount in their accounts to make a trade in the market. Day trading can be a part-time job as being successful at it requires having a focus.
Furthermore, day traders should remain prepared for risking their capital as only maintaining the minimum balance isn’t the only thing to have but they need to pay broker charges as well for assessing the trading platform. Therefore, aspiring traders should keep a track of all factors and take calculated risks that can help them to generate requisite profits.
Earning potential & career stability in day trading
The most important factor that can influence the earning potential of a day trader and their career stability is the working behaviour i.e. if one works individually or with an institution. Day traders who work for institutions don’t generally use their capital and also are equipped with a large amount of leverage, requisite tools, and information. On the other hand, some institutions allow day traders to use the software and provide requisite information but want them to use their capital in the market.
Some other factors that affect the earning potential of a day trader are the type of market, amount of leverage, and time that is devoted to day trading. Different markets provide different advantages to traders such as stock markets are the most capital intensive and allow traders to start working with less capital unlike the other asset classes such as forex and futures. Another major factor that is critically important in creating a fortune for a day trader is the fortune invested itself. A trader who starts trading at $1000 will have higher profit potential than the one starting at $100. The amount of time that a trader spends in trading determines the number of trades that they can make in a day and thereby directly influencing the earning potential.
CONCLUSION
If someone is serious about day trading, they should consider doing it like a career than pursuing it like a hobby. On one end, there is no guarantee for a day trader to make a certain amount of money in a particular amount of time. It remains non-debatable that investing the time in mastering trading strategies can help a trader to lock profits while minimizing the losses.
Day trading, if chosen as a career has its own set of pros and cons which can be managed in a certain way to take out the most benefit from it.
Day trading is indeed a lucrative career but also a challenging one. Before a trader enters in the market, they should be equipped with the knowledge of the trading world and possess risk tolerance ability along with a good amount of capital and a clear goal.
A day trader is someone who capitalizes by carrying out long and short volume trades on the fluctuations in the market price action.
Day trading refers to a practice of buying and selling a security within a day. This can be seen at various marketplaces but it can be most often seen at stock markets and foreign exchange (forex).
