Do you envision yourself lounging around at the beach with a laptop, studying stock charts, and with the click of a mouse, selecting some stocks that look promising and then hitting the water for a day of surfing? If that’s what you think day trading is, you might want to rethink that. It takes a wealth of knowledge of the stock market, digging into charts and stressing over the stock choices you make. It’s somewhat like a horse race. You’re betting on a stock continuing to climb in price for the short period of time that you own them. Here are some of the drawbacks and risks of day trading as well as ways to avoid risk.
Is your Capital at Risk?
Working with borrowed money, day traders rely on the profits from spending a large sum of money to buy stocks, which is one of the reasons that day trading is so risky. Trades are happening very quickly and there’s as much chance of losing a large sum on day trading as their is of profiting.
A huge consideration if you are thinking about getting into day trading is how much money could you afford to lose? Without a large amount of money on hand for trading, could you survive a severe financial loss that a volatile market can dish out? That’s not saying that you will lose consistently, but it is a possibility and with a large amount of money invested, you stand to lose a large amount of money on any given trade.
Can you Invest Time?
Day trading is not considered investing in stocks. Investing is studying stocks over time and buying for the long term. Traders buy and sell stocks rapidly, usually within an hour, so that is not considered investing in the stocks. They are merely riding the wave and hoping to sell the stock at the highest price point. It’s not typical for day traders to hold a stock overnight due to the day to day price fluctuations of stocks.
It’s common for day traders to spend countless hours in front of their computers, monitoring the ticker data and price fluctuations to spot market trends. You need a fast computer and a great deal of focus to keep up with the flow of data in real time. In order to profit, day traders need to be constantly aware of the margins they need to make by close of business.
Evaluating the Risks
If you love a fast pace and the possibility of huge rewards, day trading might be for you, as long as you can handle the risk of losing a large amount of money. It’s somewhat like gambling. There’s excitement, but you also need long periods of concentration and the stress of hoping to make up for your losses the following day if you lose a large sum of money. You need to be able to avoid burn out and to know when to get out before you get in too deep if you are losing money. Take all of these things into consideration when deciding whether or not day trading is for you.