Often touted as a get-rich-quick scheme, day trading may be on a lot of new investors’ minds. However, the reality is that day traders face an enormous amount of risk to reap any rewards, and most financial industry professionals don’t believe that the rewards justify the level of risk. Most compare day trading to gambling!
In fact, the profitability of day trading is a widely argued topic amongst financial experts. Most believe, in the long run, active trading strategies will typically underperform a passive strategy due to all the trading and commission fees involved (besides having to deal with making profitable trades, taking profits at the right time, having stop-loss discipline, etc). Hence, the long-term likelihood of profitable day trading is low. There are success stories of “instantly-rich” day traders out there, but we urge our readers to understand that these occurrences are once in a blue moon (and many “successful” day traders often later give up those gains and more!)
Photo by Luca Bravo on Unsplash
Day trading requires steadfast commitment, a wealth of knowledge (perhaps either about a specific industry or from extensive professional experience in the financial industry), and a significant amount of starting capital. And a lot of luck as well. If you’re unsure if you should start, get a second opinion!
Day trading is a simple concept (while making a profit from it is not). It involves buying and selling financial instruments within a single trading day, almost always using leverage.
By doing so, day traders aim to profit off what could be pretty small intraday price movements of financial assets. Note that this does not mean that day traders buy at the opening and sell at the closing prices of the financial instruments on that day. They choose when to enter and exit the positions during the trading day using various strategies, which we will highlight below. (Letting positions stay open overnight or longer means it's technically not "day trading" anymore, but many of the below concepts still apply).
Here are the most common instruments that day traders trade-in:
Unlike most of the other markets, the forex market is open 24 hours a day and hence provides unparalleled accessibility. Of course, this is a double-edged sword. Having a market open for 24 hours may mean that you may lose out on trading opportunities and hence forex trading could take up more of your attention throughout the day.
Fun fact: public data has shown that 95% of forex traders in 2020 lost money or broke even, with (maybe not too surprisingly) 80% quitting within a year of starting their trading!
For more forex trading statistics, click here.
When picking a market to trade in, one needs to consider some factors such as the span and depth of your knowledge and interest, your financial position and the trading hours of the market. It is important to pick a market where you already have a strategy in mind and you should also consider that some strategies shared online may only be useful in specific markets, specific conditions or times of the day and, of course, may also have some hidden agendas (e.g. "pump and dump").
There is a distinct difference between trading and investing. While traders aim to make profits in the short term through rapid buying and selling of financial assets on leverage, investors typically aim to make profits in the long term through buying and holding of financial assets.
Trading is thus more appropriate for producing short-term profits, but it typically involves a lot more risk, attention and knowledge of financial markets. As you’re trading intraday prices, you basically need to be immersed in the market for the entire day, especially once you have opened a position.
Meanwhile, investing is a "simpler" approach that focuses more on future goals and retirement. While attention is also required, you don’t need to be analysing the intraday price movements the whole time, but rather just the general trend of the overall movement in the week, month, or even year (depending on your time horizon). That certainly saves you some time and effort. Financial advisors or Robo advisors can also aid investing.
That’s not to say that trading and investing are mutually exclusive as most day traders invest a part of their wealth as well. This is because investing serves an entirely different yet integral purpose in our lives: to prepare for our financial goals.
The distinction between investing, speculative trading and gambling may not be so clear cut, and that’s because luck plays a significant role in all three. Speculative trading and gambling also exhibit significant overlaps around addiction. In a study conducted by Arthur JN and Delfabbro P in 2017, 7.6% of day traders were found to have problematic gambling-related behaviours. Some experts also suggest that financial speculation should be considered a form of behavioural addiction in its own right and caution traders, and more specifically day traders, to keep an eye on their own habits.
Trading isn’t a man’s world. Multiple studies have shown that women are better than men at investing and this could mean that women are better traders as well!
Most studies suggest that the disparity is due to overconfidence and low risk-aversion prevalent in male traders. In contrast, women are more cautious, have more self-control and do their due diligence before investing or trading. They are not “risk-averse” in a sense, but just more “risk-aware”.
At the end of the day, these are simple traits that set apart successful and unsuccessful traders and investors. They can be observed in any man or woman! So if you’re looking to improve your returns, you can start by doing more research on the financial instruments you have your eye on, and not reacting emotionally when things don’t go your way (which happens)!
WHAT IS DAY TRADING? COMPLETED. ✅
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