What is Day Trading?
There are many benefits of day trading. A day trade is when an investor purchases a financial instrument and sells it on the same calendar day. The idea is to take advantage of intraday price movements in an attempt to generate significant short-term profits.
Day traders are known for making large trades, often on margins that provide leverage. This is because small price movements on large, leveraged positions can lead to significant returns.
Benefits of Day Trading For a Living
Day trading is legitimate way to earn a living. There are plenty of traders who do it successfully. However, as with any other career, those who make the most money as day traders are successful because they have extensive experience, knowledge, proper mentorship and a knack for their craft.
A successful day trader always has a plan for every trade. Day traders are ok with losing money. A day trader is less concerned about news and market trends, and more focused on executing a day trading plan based on sound principals, education and proper mentorship.
Unfortunately, many newcomers fall victim to the notion that it’s a good idea to quit their jobs today and sink their savings into day trading on the stock market. This, generally, is not the right method; rather, successful day traders have a well thought out day trading strategy that does not change based on intraday market price action.
The fact is that in doing so, you’re risking your financial security. Day trading is a difficult process that requires complex charting, a detailed understanding of what makes the stock market tick, and a detailed understanding of the psychology behind movements in the market. That’s not something most people have the ability to achieve overnight.
Ultimately, if you’d like to become a full-time day trader, so be it, but plan to do it in steps.
A good way to start is by investing for some time to gain the detailed understanding of the stock market you’ll need to be successful. In the meantime, research trading strategies, charting strategies and also identify the equipment you’ll need to set up the infrastructure successful traders take advantage of.
Most important, do the research and find the right mentor who can be with you as you navigate into the world of day trading.
Once you feel you have the tools you’ll need to be successful, try your strategies out on a trading simulator and modify them as necessary. From there, it’s time to try your hand with small trades, slowly working your way up to trading with the pros.
The benefits of day trading should never be looked at as a get-rich-quick scheme, as rushing the process will cause you to lose money or worse lead to devastating mistakes.
Some Key Benefits of Day Trading
Day trading has many benefits for people are properly trained, have a good mentor, and who can manage their emotions and withstand the inherent pressures of the job:
- Potentially Healthy Profits. Done well, successful day trades can be extremely lucrative and turn a quick profit. This of course comes with potential risks, that should be managed by education and training.
- Independence. Many day traders are self-employed, working by themselves and answerable to no one. They are true entrepreneurs.
- Euphoria. There are few events that can match the emotional high that comes with a huge profit earned solely through your own efforts and your own dedication to a modern-day craft.
- Status. Day traders occupy an almost mythical status in certain communities, similar in many ways to the legendary “fast guns” of the Old West — iconic outsiders living by their own rules and making their own way.
Risks of Day Trading
As with any style of investing, day trading comes with risks. However, unlike buy and hold investment strategies, growth stocks, or value investing, when you day trade, you’re accepting a higher level of risk due to the short time frame associated with the process. Here are the downfalls to consider:
1. Volatility
Short-term volatility is what traders bank on, but predictions made over a short period of time have a lower probability of coming to fruition, resulting in higher levels of volatility risk. To offset this risk, a successful day trader does not make any trades without a planned entry and exit point.
2. Margin Risks
Day traders who use margins to increase their buying power take on increased risk by purchasing stock with borrowed money.
Should your trade go badly, you still need to pay that money back. Again, successful day traders will only enter the market with a plan.
Education on these types of day trades is critical if you want to prosper from the benefits of day trading.
In some cases, margin calls will take place, which is when declines cause the balance in your trading account to fall below margin requirements. If that happens, your brokage will require you to put up more capital to cover your risk.
The bottom line is that while margins are a tool traders often use, they’re a double-edged sword.
3. Higher Tax Burden
Returns on investments that are purchased and held for more than one year are taxed at a lower capital gains tax rate.
However, returns on investments that are held for less than one year will be taxed at the same rate as ordinary income. Therefore, short-term profits from day trades experience a higher tax rate than profits from long term investments.
Most traders that practice day trading will use self discipline and maintain proper capital in their trading accounts, and set aside proper amounts for taxes. As with any tax-related issue, consult with a tax professional concerning individual accounting-related issues.
4. Psychological Addiction
Day trading has the potential to lead to a psychological addiction. As with a gambling addiction, the potential to generate large amounts of money in a short period of time results in a drive to continue whether you’re on hot streak or down on your luck.
Becoming addicted to day trading comes with significant consequences, especially if you’re trading with borrowed money or money you can’t afford to lose.
Tools Needed to Be a Successful Day Trader
If you’re interested in becoming a serious day trader, you should look at it like any other craft. As with any profession, there are plenty of tools that will make your day trading activities more successful.
Moreover, like most businesses, day trading comes with substantial upfront expenses, making it difficult for most beginner investors to enter the market.
The most important tools you’ll need in your toolbox before you get started in the world of day trading include:
1. An Online Brokerage Account or ECN
You won’t be able to make any trades until you open an account with a brokerage firm. Because you want to try your hand at trading for yourself, you’ll need an online brokerage account that offers an intuitive trading platform.
When choosing the online stock broker you’ll be working with, look for the following:
- A Smart Trading Platform. The trading platform is where you will execute your trades. Therefore, you’ll want to make sure it provides you with everything you need to do so. This includes quality charting features and stock screeners that are laid out in a way that makes day trading a simple process for you.
- Access to Margins. It’s important that your broker offers access to margins. Day traders use margins to expand their earnings potential.
- Regulatory Oversight. It’s best to work with brokers that are based in the United States and governed by U.S. regulatory agencies.
- Commission-Free. Because commissions used to be charged on every trade made, many day traders used electronic communication networks (ECNs) to reduce the cost of trading. ECNs are automated networks that match buyers and sellers of financial products outside the traditional stock exchanges for a per-share fee.However, today there are plenty of online discount brokers that offer commission-free trading. As such, paying commissions or ECN fees are no longer necessary as long as you choose the right broker.
2. Infrastructure
The most successful day traders invest quite a bit of money into the infrastructure that’s used for their trading activities.
If you’ve seen ads for day trader training classes or even read articles online about the process, chances are you’ve seen pictures of people sitting in front of multiple monitors, each with their own charts displayed on the screen.
The fact is that to be a successful trader, you’ll need to have access to or purchase a good set of equipment, including computers, routers, monitors, and modems that, combined, will give you access to all of the real-time information you’ll need to make a profit as you day trade.
3. Money to Invest
You’ve heard the old adage, “it takes money to make money.” That adage is nowhere more true than it is when it comes to being a day trader.
Not only will you need to have enough money to cover the high-tech setup required to be successful, you’ll need substantial capital in order to even qualify as a day trader.
The Financial Industry Regulatory Authority put the pattern day trader rule into place. The rule states that if you make more than four day trades over a five business-day period, you’re classified as a pattern day trader. As a result, you’ll need to maintain a minimum trading account balance of $25,000.
The idea behind the rule is simple. First, it stops newcomers from aggressively trading without adequate knowledge of the market. Moreover, it ensures that day traders have enough cash to withstand losses.
4. A Detailed Understanding of the Stock Market
The stock market is a complex system. While investing in the long run is a relatively simple process, day trading is an entirely different animal that requires a much more detailed understanding of the market and its movements.
When day trading, traders use detailed technical analysis in an effort to use the past performance of a financial asset as a way to determine where the value of the asset is headed in the short term. As a result, if you’re going to get into day trading, it’s important that you have time to research and practice charting.
Beyond expertise in charting, the most successful traders also have a detailed understanding of market psychology. After all, they’re not worried about the intrinsic value of a company because they don’t plan to hold it long enough for its price to reach its intrinsic value.
Instead, day traders care about news and how market participants are likely to react to that news. The ability to predict market reactions takes years of experience in the stock market to achieve.
5. The Ability to Set Emotion Aside
Setting emotion aside is a difficult skill to master.
In the stock market, emotions can cause beginners to chase gains or wait too long to cut their losses. Unfortunately, these are major mistakes that can lead to significant losses in your trading account.
If you want to be successful in the day-trading arena, it’s important that you have the ability to set emotions aside and let your trading strategy guide you when it comes to making decisions in the market.
6. Time
Many would-be day traders find the concept attractive because they imagine a lifestyle that’s free of the 9-to-5 grind. However, if you’re getting into the process of day trading to escape a full-time job, you’re in it for the wrong reasons.
The fact is, day trading is a full-time job. Some day traders even work more than the standard 40-hour-per-week job would require.
Sure, it is possible to make money as a trader in a few hours per day, but the most successful devote quite a bit of time to the process.
7. Experience
As you invest, you’ll learn the intricacies of the market over time. You’ll also learn how to set your emotions aside and stick to your investing strategy.
Summary: Benefits of Day Trading
There are many many benefits of day trading. Avoid the risks with strong discipline and a mindset built for profit and you will be a full-time trader in no time. A coaching team built to help you succeed can have many benefits to the novice and experienced trader who has been following the pack with all types of indicators and false narratives.
Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”
