Day trading is a part of many trading strategies. It focuses on the gains that can be made over a single day rather than over a more extended period, and it requires the trader to close their positions before the market day finishes. Like all trading strategies, it requires the trader to do some extensive research into the pros and cons to ensure that it matches their outlook and attitude to risk. This article will act as a basic guide to the pros and cons of day trading and will be a starting point for those who want to learn more.
What is day trading?
At its simplest, day trading refers to the practice of opening and closing positions during the trading day and not leaving them open overnight. As a result, the trader is attempting to make a gain based on short-term fluctuations in price rather than potential long-term value appreciation. This differentiates it from a number of assets and trading strategies and brings its own advantages and disadvantages. It is, however, distinct in some ways from the practice of “scalping”, which is a method of trading designed to take advantages of price movements on an even more micro level, such as a few seconds. Many day traders will keep their positions open for longer than that and could be expected to open and close positions in a timeframe of a few hours.
There are certainly plenty of advantages to taking a day trading approach, and informative websites like asktraders.com with its expert advice section can help identify them. As a starting point, the first and most obvious is that it means you only need to be online and trading during whatever trading day you choose to follow. This can be a big relief for traders who are used to intense through-the-night work and is a major appeal to newbies. It means that you don’t need to be online at awkward times like during the night, provided, of course, you choose a market that is local to your area in some way.
In addition, day traders do not usually have to pay what are known as swap fees. Swap fees are levied on those who are trading margin-based derivatives, which are financial instruments that track the underlying market trend rather than actually providing ownership of an asset. The margin side of things means that customers are, in effect, borrowing part of their deposit from the lender, so holding the deposit overnight could mean the lender wants interest payments. The swap fee essentially acts as an interest payment.
Traders ought to note, however, that swap fees are only usually payable in certain circumstances. When trading on margin, you only pay interest if you go short; if you go long, you may get some interest depending on the broker.
And the cons
But no single trading strategy is right for everyone. That goes for day trading as much as any other. Day trading is fraught with potential risks, and traders should make themselves fully familiar with them before they proceed. The first potential downside to think about is the fact that proper appreciation in value is something that can only happen when a stock is held for longer than a day.
So, while an intraday price surge may be dramatic and cause a big profit, there equally may be no fluctuation at all until the following week or month, meaning the trader has missed out. And, of course, it also means that day traders are not inoculated: while a longer-term trader might be able to “ride it out” and wait for a poorly performing stock to come back into profit, a day trader can’t do that. What’s more, it also requires speedy analytical skills – and traders will need to make sure they can focus enough to make real-time decisions based on fast-flowing data.
Overall, it’s vital for traders to do some research before they press ahead with a day trading strategy. It is, like all trading strategies, one which comes with both pros and cons. The pros, such as the lack of swap fees, may well make for a lucrative and convenient approach for some traders. And the cons, like the risk of no value accumulation, may put others off. By doing some comprehensive research and potentially speaking to an expert like a financial advisor, it is possible for all traders to get to grips with day trading and decide whether or not it is right for them.