If you want to become an active trader, there are basically 2 options: become a day trader, or a swing trader. Both are seeking to take advantage of short-term movements. You can also turn to scalping, which is the most aggressive type of trading. Let’s focus here on Day Trading: its pros and cons and if it’s the trading style that fits you best.
FOREX Strategy: Day Trading for beginners
What is Day Trading?
A day trade is a trade that remains open from a few minutes to a few hours. The goal of a day trade is to capture intraday movements of a trend. With day trading, the main characteristic is that any trade opened during the day must be closed at the end of the day. A day trader should never have an over-night position.
- Potential substantial profits
Opportunities can be found on a daily basis, which gives the trader the chance to make gains every day – as opposed to investment on the long term, where it may take a long time before a trade becomes profitable.
- High leverage effect & low capital requirement
Thanks to tight spreads and margin trading, a day trader is able to invest with a small amount of initial capital, with a leverage effect reaching up to 1:400, depending on the market you’re investing in.
- High excitement & adrenaline
Day traders have to be reactive and make fast decisions. They are less likely to experience dull moments on the markets, because they open a trade for a short moment to profit from a movement.
- Potential substantial loss
As traders use high leverage, they can experience huge losses, sometimes even more than the money that they initially deposit.
- Variable spreads
Some brokers will apply variable spreads – as opposed to fixed spreads – especially for important news releases, which can increase the operation cost. The spread is your broker’s commission (difference between the ask/bid price).
Slippage can lead to huge losses, it occurs when the required price and the price at which the trade is actually triggered are different. This can happen because of breaking news stories or other important events.
- Stress & burnout risk
Day trading is very stressful, as traders need to monitor multiple screens to spot trading opportunities and act quickly. It requires a high degree of focus and concentration.
What are the main characteristics of a Day Trader?
- Sufficient capital to start
As trading is a very risky activity where you can lose more money than your initial deposit, it’s important to trade with money you do not need.
- Financial & Economical knowledge
Any trader who attempts to trade without an understanding of the markets often end up losing a lot of money. Traders needs to understand financial markets, the specific market they are trading in and other important trading concepts, such as trading jargon, inter-market analysis, how to read a quote, order types, chart types etc.
- Strategy & Money Management
As we have highlighted in a number of previous articles, you cannot hope to make money in trading if you haven’t worked on a trading strategy, organized your trading process and set your money management parameters. Without these things, you won’t be able to protect your capital and manage your risk.
- Discipline & Patience
The power of patience and discipline shouldn’t be underestimated while learning how to trade. They are core characteristics a trader must have to be successful in the long-term. Having the patience and discipline to wait for the right opportunity and follow a back-tested trading plan will highly increase a trader’s chance of success.
To be sure that day trading is for you, you need to be know if it fits your personality. Are you efficient under pressure? Can you quickly forget about past mistakes and losses to take advantage of new trading opportunities? Can you put up with stress and high pressure? You will also need to be sure you have the time to remain in front of the charts to catch trading opportunities.