Now that you are equipped with the knowledge of why most people fail at day trading, let us now look at the PROs and CONs of day trading. Let us start with the PROs:
PROs:
1. MORE TRADING OPPORTUNITIES AND HIGHER PROFITS
If you are planning to be a day trader, there are a lot of trading opportunities coming your way. There are a lot of stocks in the market that are always in the move, so there is a lot to profit from. You can actually move from one stock to another and maximize your profits within a single trading day.
However, a higher number of trading opportunities will not always mean more profits. Follow your trading plan and place trades that are fully in-line with your trading strategies. Mitigate your risks and diversify your portfolio to make your day trading success.
2. PERFORMANCE MEASURE
Day traders base their decisions mostly on intraday timeframes, such as the 15-min, 30-min, 1-hour, and 4-hour which offers more tradeable setups. On another note, this could give instant results on your chosen trading strategy. You could see how you are performing as a trader, and how high your stocks are gaining.
To actually measure your performance, you may create or keep a trading journal. Track all your trades within the day, and look for patterns that tend to reduce your profits or lead to losses which you can be avoided in your future trades.
3. NO OVERNIGHT RISK
Day trading does not expose you to overnight risk. A lot could happen overnight which might affect your position if you choose not to day trade. We don’t know what price will the market open, so choosing day trade lowers your risk of losing your money, while protecting your gains.
4. OVERREACTION TO NEWS
One of the catalysts that affects the market prices are the news and company disclosures. Observe that when there are news circulating around, there tends to be large price-movements even if it is unimportant. These news stir market sentiments which allows the price of a certain stock to go higher, and as a day trader, you can actually take advantage of that behavior and capitalize profits.
5. TECHNICAL SETUPS
Since day trading uses short-term trading styles, it means that they rely to using technical analysis rather than the stocks’ fundamentals. Watching multiple screens can make you spot trading opportunities, and act quickly to execute them. You can see real-time how much you are gaining, and see immediately if you are incurring losses.
Let us now proceed in discussing the CONs of day trading:
CONs:
1. HIGHER TRADING COSTS
Whichever trading platform you enroll an account with, there will always be trading fees associated with each executed trade. And since you will be doing multiple trades in a day, make sure that the profits you gain is not being reduced by the commission fees to the broker in the long run. The solution for this is to look for brokers that offers low trading fees, so that you could maximize your profits.
2. LIMITED PROFIT POTENTIAL
I know that we listed higher profits in the PROs earlier but day trading also offers limited profits. The market is always moving and it is always volatile, so there are day traders that would choose to close their positions within a day regardless of their profit to avoid the overnight risk. You might be doing your due diligence already and have plotted out your entry points, but there will be always be an instance that the market will go opposite of your analysis and findings, so you have to protect your capital, thus leading to taking lower profits.
3. THERE IS RISK IN OVERTRADING
Day trading could be addictive, especially when you are gaining profits consecutively. It could be compared to people playing in a casino. Once an individual wins in a series of plays, one could think that they already mastered the art of gambling so they play some more. And when they lose money, they play again in frustration and blindly aim to get back the money they lost.
It is also the same with day trading. You might be overconfident with your trades that you stray away from your plan, and just randomly buy stocks and sell them. It will get a hold of you sooner or later, and you might be surprised that you are already wiping out your gains instead of making them grow.
4. YOU WILL HAVE NO TIME TO THINK
The market is fast-paced so day traders will have no time to think. That is why coming up with a trading plan is a must, and day traders must strictly follow it. The constant move of the market might scare starters thinking they would not be able to profit off of it, that they immediately jump to the hype. Avoid impulsive trading at all costs, and do not execute your trades without having researched about it beforehand.
5. PRONE TO LOSSES WHEN FAILED TO EXECUTE SELLING, AND WHEN MARKET CRASH
It is inevitable that a market crash happens once in a while. As a day trader, you should always be setting automatic cut-losses and selling stops so you could avoid incurring bigger losses just because you blinked or went away from the keyboard to take a bathroom break. There are cases that trading platforms slows down when there are too many traders are using it, so having automatic automatic cut-losses and selling stops would be a great help.
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