Here’s why day trading isn’t as cool as you might think!
When you think of day trading, you might be picturing the fictional investors from the movie Wall Street looking at large moving graphs while actively trading. Then at the end of the day they are raking in the cash. The truth about day trading is much more complicated.
Day trading is buying and selling stocks with the goal of achieving short term profits (typically in one day). While there are thousands of stockbrokers involved in day trading stocks, it’s not for everyone.
Techniques for Day Trading
There are numerous techniques for day trading, but the first thing you should know is that most successful day traders treat this as a full-time job. It’s not something you can do on your coffee run. That’s because day traders rely on the volatility of the market and attempt to use this up and down of stock prices to earn a profit.
Some of the most popular day trading techniques are:
1. High-frequency Trading (HFT).
This is an automated strategy that uses sophisticated algorithms and computer systems to find small short-term opportunities to buy low and sell high for a profit. This all takes place in fractions of a second, too fast for a human to calculate.
Scalping attempts to make numerous small profits off the small price changes in stocks throughout the day. This strategy requires you to consistently be right about predicting which direction a stock price will move throughout the day, which is hard to do.
3. Range Trading
Day traders primarily use technical analysis in the range trading strategy. They look to find stock prices that have deviated from a determined range and let that inform their trade. This relies upon the assumption if a price deviates from a specific range, it will bounce back into that range which is not guaranteed.
4. News-based Trading
This day trading technique typically takes advantage of changes in stock prices caused by the news or media. This relies upon the assumption that you act on the news correctly before other investors do.
All of the above day trading techniques pose challenges for even the most seasoned traders and to some extent rely on “crossing your fingers” you earn a return.
The Risks of Day Trading
Day trading is a risky business and should not be treated as a solid long term investment strategy. Below are three major risks that come with day trading:
1. No One Can Predict the Market (not even the pros)
Market prices run on supply and demand. This means stock price movements are based on thousands of trades each and every day and this is not possible to predict.
2. Professional Traders Have Access to More Resources
There are thousands of professional traders that devote all of their time to researching specific trends. Those professional traders often have access to information you don’t with quick technology to boot. This helps them execute their trades at the moment they believe is right, giving them an advantage.
3. It’s All Too Easy to Get It Wrong
Even with all the advantages professional traders have, they still get it wrong. Professional day traders know that sometimes their strategies will work out and sometimes they won’t. There is a huge margin for error and this means a high risk of losing your money.
The bottom line is that day trading involves a lot of risk and isn’t for the non-professional investor.
Instead of Day Trading, Try Investing with Finch
Day traders rely on very technical analysis to place their bets and often make tiny profits on each trade. They hope the profits will compound over time- but we don’t like to lean on hope alone for building wealth.
Studies have shown that investing consistently over a the long term, not quick day trades, provides a return you can count on. In other words, instead of “timing the marketing” focus on “time in the market”. Finch helps you maximize your “time in the market” by automatically investing your deposits and always keeping you invested at your optimal portfolio mix. You can start investing from wherever you are with whatever you have and rest assured knowing your money is always working for you. Plus, when you need access to your money, you no longer need to worry about lead times and managing trades. With Finch you can access your money instantly!