The pandemic caused incredible volatility in the markets, also leading to unprecedented growth in day trading activity (and interest).
If the economy is to benefit in the long-term, however, the practice must be professionalized. Also to try to mitigate the risk of personal losses by traders. These are just the first few words of what Select Vantage President & CEO, Daniel Schlaepfer, wrote for The Parliament Magazine some time ago.
Why Professionalize Day Trading?
The unprecedented growth of day trading in the past years has been remarkable. At the same time, many people with little trading experience have entered the market in droves… and exposed themselves to massive risk.
After all, the prospect of making huge profits fast on the market by exploiting volatility has its appeal.
Our company usually offers its specialized training to partners only (office managers and traders). However, we decided to meet the needs of new and aspiring traders with our broadcast channel, TraderTVLive.
It’s the first daily live-stream show on YouTube dedicated purely to day trading, and it provides viewers with market analysis, trading tips and tricks, and more (there is also a trading tips channel, Market Wisdom).
Not only do many traders watch it to learn about trading, but they also tune in for the sense of community that the platform has helped to foster even in those professionals who, due to the world health emergency, are forced into working remotely.
Why day trading is better than investing
A common question is why we recommend being a day trader compared to investing. First, day trading makes it possible for one to make a quick buck. In this case, you can buy a stock at $100.20 and sell it when it moves to $100.35 for a small profit.
Second, traders can make money when the market is moving in either direction since they are unbiased. As such, they can buy a stock they strongly believe will go up and then short one they expect will retreat in a certain period.
Third, traders are not exposed to overnight or weekend risks. In most cases, traders are usually recommended to end their overnight trades in a bid to avoid gaps such as the one shown below.
Further, the reality is that no one can accurately predict what will happen in the next few months or years. For example, it was hard to predict the Covid-19 pandemic or the shift to electric vehicles.
As such, traders can take advantage of these market conditions and their volatility. Examples of other market events that one can take advantage of are Wall Street Bets and new information from the central bank and earnings.
Trading has risks
At DTTW, we have seen many people start small and grow their accounts over time. Some of our traders have been in the business for over two decades. However, trading also has some risks, which have seen many people lose millions of dollars. Some of the top risks of day trading are:
- Fear of Missing Out (FOMO) – There is fear of missing out, where people buy or short stocks that are rising without doing research.
- Instant gap – There is a risk that an asset will have an instant gap when there is a major news event during the session.
- Leverage risks – There is always a risk of losing more money than you invested if a trade goes against you.
- Infinite losses – Since shorting is part of day trading, it is possible that a trader can lose all money in case of a short squeeze.
There are other risks that traders face, which explains why most people who start trading fail. However, in the same way, investors also face significant risks, which also explains why many hedge funds close on an annual basis.
Fortunately, there are many ways for reducing these risks. Some of the most popular risk management strategies are:
- Having a stop-loss – A stop-loss is a tool that automatically stops a trade when it reaches a certain loss level.
- Trade size – Position sizing plays an important role in day trading. You should ensure that you have a small trade size to prevent making substantial losses.
- Doing research – You should always do your research when implementing trades. In other words, always have a catalyst before you open a trade.
- Having a trade journal – A trade journal is a document where you write all your trades. The document will help you avoid historic mistakes.
Day trading is a popular way for making money online. In this article, we have looked at some of the main benefits of day trading and why it is often better than investing. We have also looked at the main risks that are associated with trading.