When you look at a price chart – whether it’s for a stock, currency pair, or futures contract – it seems that making money should be easy. New day traders often focus their attention on the big moves and think: “If I had gotten in there, I would have made a fortune.” Adopting such an approach can lead many people to believe that day trading is relatively easy and a quick way to get rich. Day trading can provide substantial income if you know how to handle it. However, for most people, the amounts of time they spend learning and practicing prevent them from gaining enough experience to achieve consistent profits from their trades.
Success Rate of Day Trading
It is hard to make a profit through day trading, and although every trader thinks they can make money, most people who attempt day trading end up with a net loss. You can improve your chances of successful trading by understanding the risks that can lead to losses and overcoming the assumption that day trading is easy.
The Need for a Strong Method
One reason that traders may lose money is the lack of a strong trading strategy. Looking at past charts is not an effective way to create a winning plan. If you develop a strong strategy, it can be used in multiple market conditions and can even tell you when to stay out of the market because conditions are unfavorable. The goal of your strategy should be to uncover patterns and trends that indicate trading opportunities that can provide positive returns. Without conducting this research, your results may be significantly determined by chance.
Investing Time in Training
Many beginner traders fail to understand that day trading takes a lot of time to learn. Putting in a few hours of research without ongoing commitment to day trading won’t make anyone a successful trader. You will need to practice day trading while maintaining another job unless you have the funds set aside to cover your expenses for several months or more. It is not uncommon for day traders to not see immediate income when they start. Most day traders do not see their efforts lead to enough profits to pay themselves any type of income for several months.
Market Volatility
Many problems and situations contribute to making the market difficult to assess and navigate. Spending time learning and understanding what leads to changes in trading activity can help you better prepare to respond to those changes. Learn how to manage financial risk in case you make the wrong decision about the trading direction by placing a stop-loss on your trade. Consider it a way to help reduce the amount of money you may lose while pursuing trading opportunities. Understand that you cannot always get the exact price you want when trading, especially with market orders. Heavy trading activity can push the price away from the exact target before you can respond. You may choose to skip a good deal that could still be good or accept a less-than-ideal market price. Both options will reduce the theoretical profit on the trade. Even if you use limit orders, only part of your order may be filled on winning trades (if the market moves away before the entire order is filled) but end up with full positions on losing trades (if the price moves against you, so, unfortunately, you always get your full order).
Greed and Fear
The desires and intentions of day traders can significantly affect the outcomes of their efforts. Simple success can lead to greedy actions that diverge from a defined trading plan. These actions may include taking actions too quickly, holding onto a profitable gain for too long, or not cutting losses early enough in a losing trade.
Can
Fear can also cause day traders to stay very close when there is an opportunity to be made. They may also sell in a panic in response to breaking news without considering all other factors. Developing a strong trading strategy is greatly beneficial as it keeps you focused on your results without being affected by emotions.
Frequently Asked Questions (FAQs)
Which is more profitable, scalping or day trading?
Due to the fast pace, day traders may have more opportunities to profit from trades compared to scalpers. This is assuming that the trader is equally skilled in both methods and can devote enough time to day trading. In reality, both day traders and scalpers typically find that they cannot consistently outperform the broader market.
Is day trading more profitable with low-value stocks?
Low-value stocks can be relatively volatile, but this does not mean they are more profitable than other stocks. The relative instability and illiquidity of low-value stocks make them riskier assets. In other words, low-value stocks can be more profitable for day traders, but they can also lead to larger losses compared to high-value stocks.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
ScienceDirect. “The Cross-Section of Speculator Skill: Evidence From Day Trading.” Journal of Financial Markets.
Reza Mahani and Dan Bernhardt. “Financial Speculators’ Underperformance: Learning, Self-Selection, and Endogenous Liquidity.” Journal of Finance, 62(3), 1313-1340.
U.S. Securities and Exchange Commission. “Day Trading: Your Dollars at Risk.”
U.S. Securities and Exchange Commission. “Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders.”
U.S. Securities and Exchange Commission. “Limit Orders.”
Source: https://www.thebalancemoney.com/why-it-is-so-hard-to-make-consistent-money-day-trading-1031238
Leave a Reply