Day Trading: The Good News and the Bad News

Day trading is a type of stock trading that involves purchasing a security and then selling it within the same day in order to realize a short-term profit. This type of trading can potentially generate nice profits, but it also has a few drawbacks that you should be aware of. Here are some of the benefits and risks of day trading.

Big Profits

The biggest advantage of day trading is that you can generate big profits in a short time. Many people who have learned how to be successful day traders can make huge returns compared to with some of the other trading strategies that are available. With this type of trading, you are looking for short-term profits. When the market moves quickly, you can bring in more profit in a day or week than some people make in a month or year. 

Instant Gratification

Another one of the big benefits of using this method is that it provides you with instant gratification. With other types of trading, you have to take a "wait and see" approach. You buy a stock, and then you wait for the long term to see what happens. It could be years before you realize a nice profit on your trading. With day trading, you get to see what happens in real time. You will know right away if you make any money on a trade. One of the biggest problems that many people have with investing is that they cannot stand waiting to see what happens. This method of trading is ideal for those who are impatient and want results now.

Increased Risk

One of the potential drawbacks of this type of investment is that it has significant risk associated with it. With day trading, you can make a lot of money, but you can also lose a lot at the same time. The market moves very quickly, and you have to be aware of what is going on if you want to avoid losing your shirt.

Large Account Minimums

Another potential drawback to this type of investment is that you have to invest a large amount of money in your account. According to Securities and Exchange Commission (SEC) rules, if you are a pattern day trader, you have to have an account balance of at least $25,000. This eliminates many people from getting involved because they do not have the necessary funds.

Technical Analysis

With this type of investment, you have to rely on technical analysis to help you make your decisions. This means that you are staring at a computer screen reading price charts the majority of the time. Many fundamental investors still are not fully convinced that technical analysis works, and you are trying to figure out what is going to happen within the next few hours instead of the next few years. It can be very difficult to predict what will happen with the price of a security over the short term, but this is exactly what is required with day trading.

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