Should You Be Day Trading?
In this article, I’ll show you the pros and cons of day trading so that you know exactly whether or not you should consider it.
Because these days, day trading is super popular. And there are several advantages to day trading, but there are also some challenges.
The 4 Pros of Day Trading
So let’s first go through the pros of being a day trader, then we’ll dive into the potential cons.
Well, first of all, what does it mean to day trade?
Day trading means that you are opening and closing a position within the same day. In many cases, traders will hold positions for just a couple of minutes.
That’s what most day traders do. When I’m day trading I’m typically holding a position anywhere between 3 and 20 minutes. So that is very typical for day traders.
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So what are the pros of day trading?
One: You will see instant results
First of all, it’s fast and you will see instant results. And what do I mean by instant results?
Well, within a few minutes you already know whether you’re right or wrong, because either the trade moves in your direction and you’ll be able to make a profit, or it moves against you.
So at the end of the day, after you have done some day trades you already know how well you’re doing, right?
This brings me to number two…
Two: You don’t have overnight risk
Whatever you realize by the end of the day is in your account. So therefore, the results are more instant.
Consider swing trading for a moment.
You see, the way I swing trade, I’m in a position typically between 5 and 20 days. So this is where you need to give the trade some time to develop.
And this is where you will see some ups and downs and you don’t see instant results that you do with day trading.
Also with the overnight risk, as you know, right now markets are moving crazy, and some people love to not have overnight risk because you don’t know where the markets will open in the morning.
Let’s take a look at this right now. So today, you can see the markets were opening higher.
And if you look at stocks like Kodak, for example, it suddenly opened way higher overnight.
Another one is ADT, that recently opened with a huge gap.
Now, obviously gaps can work in your favor as well as against you. Let me give you an example of one that might be working against you, Intel.
So this is Intel, and as you can see, it was nicely trading between $60 and $62. Then suddenly it plummeted down to $50.
So as you can see the charts showed a long signal, then Intel fell out of the sky after their earnings report.
These are the types of things you will avoid when day trading.
Three: It’s an adrenaline kick
It definitely is an adrenaline kick, right?
I mean, you know that you can make hundreds of dollars, maybe even thousands of dollars depending on your account size in a matter of minutes.
So it can be very addictive here. It definitely gives you the adrenaline kick and this is why people love day trading.
But although it may feel good, being all jacked up on emotions is not a recipe for consistency when trading.
Four: There is no overthinking
The other thing with day trading, there is no overthinking and here’s why.
When day trading, you have to make a decision in a split second. I mean, the markets don’t pause for you.
The markets are moving, so the markets are moving quickly, and when you see an opportunity you need to jump on it right away.
And this is why some people love day trading, because this way they don’t have the tendency to overthink.
With day trading, it’s really hard to overthink things. With day trading there’s no analysis paralysis because if you snooze, you lose.
So these are the the four major pros based on my experience that I see. And at the beginning of my trading career, I used to day trade a lot.
These days, after many, many years of trading and as I’m getting older, I prefer swing trading.
The 5 Cons of Day Trading
Now that we’ve talked about the pros of day trading, let’s discuss the cons because there are some key disadvantages that may make you think twice about day trading…especially if you’re new to trading.
One: It might require $25,000
When day trading, it might require $25,000 to day trade.
Now, why do I say it might require $25k?
First of all, this is only true when you’re trading stocks and options, and it is only true when you’re trading in a margin account.
If you’re trading in a cash account, the pattern day trading rule does not apply.
So again, $25,000 for you might not be a problem, for other traders they may struggle to come up with it.
Two: A smaller stop means smaller profits
Another con is that you can use a smaller stop, but with a smaller stop it also means that you will have smaller profits.
Now, let me explain this to you, because this is where I want to spend a minute and show you exactly what it means.
Some people don’t understand this relation, so I want to go to the charts and take a look at Microsoft.
Here is a daily chart of Microsoft:
So Microsoft jumped today.
Now, at the very bottom here, you see an indicator that is called the average daily range.
What does the average daily range mean?
The average daily range means how much does a stock move on average from the high of the day to the low of the day.
And right now, the average daily range in Microsoft is $4.60.
So this means that when you are swing trading, your stop loss, of course, needs to be at least $4.60. Otherwise, you will get stopped out.
Now, here’s a rule of thumb that I personally like to use: If I use this as a stop loss, I want to see twice as much as a profit target.
So here in this case, I’m looking for two times the stop loss as my profit target. So this means my profit target is $9.20.
Now, if you are only trading 100 shares of Microsoft, then you know this is per one share. It would be $460 dollars as a stop loss on 100 shares, and $920 as a profit target.
Now, let’s take a look at a five minute chart.
If you’re trading on a five minute chart, let’s say that you’re trading the breakout above, let’s say $214.50.
Where would you place your stop loss?
You can place your stop loss at around $213, so it’s a rather tight stop not giving you much room. So this means your stop loss is only $1.50.
But this is where you get the idea, if you’re applying a stop loss of only $1.50, you could only make around $3 because we have barely scratched $217 here.
It is very, very important that you understand: The smaller the timeframe, the smaller your stop loss, and therefore the smaller your profit targets.
Keep this in mind.
Three: It can be very addictive
Now, what is another con of day trading? Well, it can be very addictive.
Day trading for some people, it’s almost like a slot machine in a casino.
I’ve seen people wiping out their account because they got addicted to day trading.
When you’re swing trading, like I prefer doing these days, you only place a trade a day and after this, you’re done and you can relax.
Four: You have no time to think
Another con is that you have no time to think.
And again, this can be a pro because you can avoid overthinking but it also leads to impulsive trading.
And this is what I see many traders are doing, especially day traders, that they are trading impulsively.
Because they see that the market starts moving and now they are scared that the market might run away.
This is sometimes where FOMO (Fear Of Missing Out) kicks in.
And so they quickly buy, and they often buy at the high.
So no time to think can be a pro, but it can also be a con because this leads to impulsive trading, and typically, impulsive trading never worked for me.
Five: The risk of overtrading
So let’s talk about a fifth con that I see here, and this is the risk of overtrading or also revenge trading.
What do I mean by this?
Especially when a day trader starts in the morning and has a few losing trades here, the trader might say, “Oh, if I just trade more, I will make back the money that I lost.”
Now I don’t know about you, but what I experienced when I was overtrading or revenge trading, usually when I had a bad day, it just got worse.
And this is where I see many day traders wiping out their account by just overtrading, revenge trading, and doing a lot of impulsive trading here, and doubling down.
These are the main pros and cons of day trading that are based on my own personal experience.
When is day trading for you?
Well, I want to say day trading is not for you if you like to analyze your trades and think about it before you enter.
So if you want to take some time and say, “Alright, let me take a look at the trade and think about where will I placed my profit target and my stop loss” then day trading is not for you.
The markets don’t pause for you, the markets just keep moving. And especially these days, the markets can be moving fast.
Day trading is also not for you if you might have an addiction problem. And hey, you know yourself best, right?
I mean, do you think that you could get addicted to day trading? Most people can, and no addiction is a good addiction, right?
Now, lastly, day trading is not for you if you easily get stressed or overwhelmed. Again, you know yourself better.
Day trading is super fast, it’s like driving on the German highway at 180 miles per hour. If you’re an experienced driver, it’s fun. But if you easily get overwhelmed, then day trading might not be for you.
If you know anyone who is considering day trading, or analyzing the pros and cons, please feel free to share this article.
SOURCES : https://www.fxstreet.com/education/should-you-start-day-trading-here-are-the-pros-and-cons-202010021708
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