If you're new to day trading, the open market can be very exciting. However, inexperienced traders often get caught up in emotion when success demands analytical thinking and objectivity.
Day trading is the process of buying and selling financial assets within the same day with the goal of making a profit. In the past few months, the idea of trading has been getting popular among many people. However, the reality is that being a successful trader is a difficult process, which explains why most people fail.
Indeed, in Europe, online brokers are required by law to specify the percentage of people who fail in a given month. A quick look at the most popular brokers in the region shows that more than 75% of all traders who create accounts don’t succeed.
In this article, we will look at how day trading works, why it is so hard, and strategies to improve your skills. Small spoiler: as much as it might go against the grain, the best way to start is to start slow.
How day trading works
Day trading is a process where a person does analysis on a financial asset and then executes a bullish or bearish trade.
In a bullish trade, the trader will benefit when the asset’s price rises while in a bearish trade, they will benefit when the stock falls. There are different types of financial assets that are available for day trading. They include:
- Forex - These assets refer to currency pairs like EUR/USD and GBP/USD. The idea is to buy a currency pair you expect will rise and sell one you expect will decline.
- Commodities - These are raw materials that are used in various industries. They are classified into precious and base metals, energy, and agricultural commodities. Examples of the most popular commodities are crude oil, natural gas, gold, and silver.
- Stocks - These are shares of publicly traded companies like Alphabet, Netflix, and Microsoft.
- Cryptocurrencies - These are digital currencies that have been popularized by leading coins like Bitcoin, Dogecoin, and Stellar.
- Indices - These are assets like Dow Jones and S&P 500 indices that track a group of stocks.
Other popular assets that are traded include bonds and exchange-traded funds (ETFs).
Day Trading Versus Position Trading
Day trading is a different concept than investing. The main difference is that day trading is more short-term than investing. In investing, people buy and hold assets for months and even years. A good example of this is Warren Buffett who has held some companies like Coca-Cola for more than 30 years. During this time, the stock has declined and fallen while he has continued to hold it.
There are pros and cons of day trading and investing. The benefit of day trading is that one can take advantage of companies that are rising and falling. Also, one is not exposed to overnight risks in day trading. On the other hand, investing allows one to make substantial gains in the long term.
FAQs before you start day trading
Is day trading gambling?
A common misconception about day trading is that it is simply gambling. This misconception comes from the fact that there are usually a 50-50 probability when you open a trade or start gambling.
When you open a trade, you can lose money or you can make money. The same is true when it comes to gambling. However, there are some important differences between the two.
For example, in day trading, there are thousands of assets that you can day trade, such as stocks, cryptocurrencies, and commodities. Also, there are various approaches like technical, fundamental, and price action strategies that traders use to determine whether to buy or sell an asset.
Another difference between the two is that trading companies provide their customers with leverage. This allows them to make trades that are significantly bigger than their trading accounts.
At the same time, there are multiple risk analysis strategies that traders use to limit losses. For example, brokers provide tools like a stop-loss and a take-profit that help to protect their trades.
Why is trading hard?
There are several reasons why day trading is a difficult exercise. Some of these reasons are:
• Multiple catalysts - The reality is that financial assets are moved by multiple catalysts, which are difficult to decipher for most people. For example, a company’s stock price can decline even after it publishes strong results. This can happen when it publishes a weak forward guidance.
• Multiple concepts - The next reason why trading is difficult is that there are many concepts that one needs to learn when starting to trade. For example, one needs to learn the concepts of technical and fundamental analysis.
• Volatility - At times, the financial market can be extremely volatile, which makes it extremely hard to operate.
• Impatience - At times, traders are increasingly impatient when starting their careers. They want to start today and succeed tomorrow. Well, patience its one of the key to succeed as a trader.
How long does it take to learn to day trade?
A common question is on the average time it takes to learn to day trade. This is an important question that any trader should know about. The real answer is that it depends on a number of factors.
For example, if you are learning about it, the process will typically take a short period of time. On the other hand, if you are juggling other activities, the process will take more time.
There are several components of learning to day trade. First, there is the literature part, where you need to learn about how the market works. We recommend that you use trading books, online courses, and YouTube videos.
The second part is practical in nature. This is the process where you will focus on staying in a demo account and practice what you have learnt. Therefore, at a minimum, you should spend at least six months.
How much money can I make day trading?
This is a common question that many people ask. Sadly, there is no perfect answer about how much money you can make in day trading. This is simply because even the most experienced traders don’t have a 100% success rate. They lose money at times.
However, if you are really good at trading and risk management, it is possible to make returns of over 50% per month. Therefore, if you have a $10,000 account, it is possible to make $5,000.
You can see our most profitable partner offices week by week here.
Is trading time-consuming?
There are several approaches when it comes to day trading. First, there are people who spend less than 30 minutes every day and are equally successful. These traders simply do their analysis and then set their trades.
On the other hand, there are scalpers who spend many hours analyzing and opening trades. Scalping is a more time-consuming process.
» Related: Scalping vs Day Trading
Is day trading worth it?
Yes. Day trading, as long as you are prepared to do the work is totally worth it. It is a good process of making money in the market. However, your success will depend on the amount of time you are ready to spend.
Becoming A Successful Day Trader
Becoming a day trader is like starting your own business. You have to invest money to make money.
Many beginning traders are under-capitalized. A good start-up working capital would be in the range of $50,000-$100,000. Allocate a set amount of money for trading and let that amount be only what you can afford to lose. Hard losses come easier when you still have enough set aside to pay your bills.
» Check out our ton of tips for becoming a successful trader
Technology isn't everything
Some day traders get stuck in the technology trap. They mistakenly believe that the right software or better hardware will ensure success. Nothing could be further from the truth. Technology is only a tool, and it's only effective when you know how to use it.
Keep emotions in check
To succeed as a day trader, you must master your emotions and make clear-headed decisions. This doesn't mean making the right choice every time! Rather, it means making the best and most informed choice every time.
The best decision won't always be the right decision, but a sound decision will almost always trump an emotional decision.
Keeping your emotions in check is even more valuable when you suffer a loss. Feeling bad about losses will only set you up for additional losses. You need to stay clear-headed, follow your trading plan, try to manage it and start trading again.
Be your portfolio manager
When you start trading, see yourself as a risk manager for your own portfolio. Part of sound trading is buying when the market is low and selling when the market starts to rise. Choose one market and learn all you can about it.
Take educated risks and make only high-probability trades. The more you know about your market, the sounder your trades will be.
Unfortunately, if you were looking for a business that would make you a lot of easy money without effort, you were wrong: day trading, done sustainably and professionally, is a discipline that requires sacrifice, perseverance and attention. But it also brings a lot of satisfaction.
We explain better. It is possible to make money quickly with day trading, for example with a very high level of leverage, but also the risks increase exponentially. And this is not sustainable for a career as a trader.