You are not the only one wondering this. There are many reasons why day trading can be appealing. People who prefer to take an active role in investing may be drawn to the numerous strategies and research required to become efficient day traders.
Day trading can be a good option, but is it always the best? Is it worth the effort? Is it possible to make money from it?
Let’s begin with a brief introduction to day trading to answer these questions.
Trading intraday refers to buying and selling shares within the same day. While trading intraday, you should square off your positions before the day ends. Intraday trading can be challenging for beginners due to the market’s higher volatility compared to regular trading. However, if intraday trading is strategized well, you can make the most of your money by trading intraday.
Are Day Traders Profitable?
People often ask, “Can I earn money from day trading?” Definitely! You can do it! Advisory firms often shame day traders without recognizing that some of them DO make money. Some investors (albeit very few) have made a living from their investments.
Yet.
There is a crucial “yet” here. How well do day traders make money consistently, and what are the risks involved? Many holistic financial planners advise staying away from it because of the answers to these two questions.
Approximately 13% of day traders make money in a given year, and just 1% make money consistently.
That’s 1 in 100. By day trading as a career, individuals bet their life savings on the possibility of being one of the 1 out of 100 who succeed. Day trading and gambling are often compared for this reason, and one cannot ignore their similarities. With both methods, it is possible to get rich quickly, although some people are successful. Neither are slow-paced nor low-risk, and they can offer thrills or generate a sense of accomplishment. But can day trading replace traditional or more conservative investments? Statistically (and historically), it is extremely unlikely.
As lucrative as intraday gains can be, you need to know the risks of trading intraday.
- Security Selection Risk: It is the risk of selecting the wrong stock for day trading. A faulty portfolio mix can turn intraday trading into a looming experience. It is necessary to apply the right intraday strategy to determine the stocks to be selected.
- Volatility Risk: It is the risk of sudden and unexpected market changes that further impacts stock prices. While planning your intraday strategy, you should always be prepared for an uncalled storm.
- Exposure Risk: Since intraday trading provides traders with extra leverage, they tend to take positions higher than they can afford to cover. Gains from a high level of exposure come with a risk of magnified losses.
The above risks, along with five significant rules, must be considered before getting into intraday trading:
- Place trades for an amount that you can afford to lose.
- Research well before trading.
- Have a clear intraday strategy.
- Time your trades.
- Always close your positions.
- It is crucial for you, as a beginner in intraday trading, to determine the right strategy. Mentioned below are examples of strategies used by traders for achieving success.
- Scalping: It refers to a strategy designed to generate small profits from slight changes in prices throughout the day.
- Range trading: This type relies primarily on support and resistance levels for buying and selling decisions.
- News-based trading: This type of trading typically capitalizes on the elevated volatility associated with news events.
- High-frequency trading strategies: These strategies exploit short-term inefficiencies and minor market variances through sophisticated algorithms.
- After carefully evaluating your risk appetite and market conditions, you must take a final call on the intraday strategy to adopt.
- To improve your chances of success, do not lose sight of the following day trading tips:
- Restrict stock selection to 3–4 liquid stocks.
- Set your stock target price and stop-loss levels.
- Do not move against the market trend.
- Avoid being an investor.
- Once the target is reached book profits.
Finally, it's up to you what you do with your money.
How you spend your money is up to you. It is wisest to keep your risk relatively low when day trading – say, 10% of your actual portfolio value. Although that amount might be enough to gain day-trading experience, it won’t completely wipe out your portfolio if your short-term investments lose money.
This post was written in collaboration with Asif Yahiya Sukri LLP. Asif Yahiya Sukri LLP provides unparalleled personalized financial services to a broad range of clients across different geographical locations. With a presence in the USA, India and the MENA region, they ensure that all of your financial decisions are made carefully and with your best interests in mind. They are innovators who understand what goes into building companies.
You can also reach out to them on info@aysasia.com
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