We’ll start with a disclaimer in this section. This article is in favor of day trading (especially if you’re utilizing effective day trading strategies).
That said, transparency is a core component of who we are at Sniper Trades. We’re educators and experienced traders ourselves.
Thus, awareness of risks associated with day trading is necessary. Your hard-earned capital is at stake, and you deserve to know of all potential landmines that can cost you money.
Another caveat is that these risks can all be offset with fine-tuned day trading strategies–a topic we’ll also delve into.
Why is Day Trading Risky?
Per Zippia, the average annual salary of day traders can reach $154,000. Even on the low end, a skilled day trader can make almost $90,000 yearly.
For added context, the average salary in the US is a smidge over $60,000. Realistically, that’s good money–you’re sitting relatively pretty with those types of yearly earnings, even in the days of inflation. It goes to show you how profitable day trading can be.
Let’s add more context: the median amount invested by 35-to-44-year-olds is $22,000. A consensus “good” yearly return on that amount would be 10% of the investment for long-term strategies. Quick math tells you that works out to $2,200 in profits. That’s a far cry from the low-end $90,000 a career day trader can make.
Day trading successfully is an approach rooted in the present. It’s for people who want to make money now.
Naturally, such a method comes with risks. If it were easy to walk into day trading and make a fortune, everyone would do it and be successful. We’d live in a world of gold houses and platinum cars. Instead, day trading is a gamble. That’s not a knock on gambling by any means. Look at poker, for instance–success is derived by playing your cards right. Day trading is no different.
Day Trading Can Be A Zero-Sum Game.
Markets aren’t a zero-sum game in the long term.
The conventional US Stock market has increased by 6% to 7% annually in real terms. Companies continue profiting, and the US Treasury keeps bolstering the money supply. All you need to do is remain patient and develop a well-constructed stock portfolio to see solid returns as the years go by.
Day trading doesn’t offer the luxury of long-term breathing room. The immediate ebbs and flows of the market drastically impact your ability to thrive as an investor. It becomes a zero-sum game. You end up competing with other day traders, and your success often rests on someone else’s failure (and vice versa).
This environment is conducive to hunter-hunted scenarios. You’ll end up against some of the savviest traders in the world…therefore, you need to be as savvy as them. You need to learn to be the hunter and not the hunted.
To perform day trades, a minimum equity of $25,000 is required in a pattern day trader’s margin account. This amount can be a mix of eligible securities and cash. In other words, you put a lot on the line in a competitive environment to turn quick profits. Inherently, this practice is risky. Whether it’s a calculated risk or a fool’s errand will depend on your approach.
Sophisticated Day Trading Products Can Exacerbate Losses.
Many sophisticated products are involved with day trading and day traders must frequently employ leveraged investment approaches.
When traders use borrowed capital to buy stocks or other securities, it’s classified as leveraged investing. Examples of this approach include options and margin trading. It can increase day trading profits if the market or stock price shifts positively.
That said, leveraged investing is riddled with risks–and not all of them are always immediately evident.
Leveraged investing can lead to monumental financial losses if the market takes an unfavorable turn. In fact, by making leveraged investments, you can lose far more money than you invested initially.
Given the complex nature of leveraged investing and day trading, it’s a strategy that should only be utilized by well-schooled investors.
Day Trading For The Wrong Reasons Is An Uncalculated Risk.
Day trading can be a highly profitable career. Those with an analytical mindset and a knack for quick thinking will flourish.
However, influential people–like celebrities–can sometimes boast about the virtues of day trading and make it seem like a sure-fire bet.
Those entering the market and looking for fast returns might get lured by day trading for the wrong reasons. It’s not a get-rich-quick scenario. Yes, you can make money fast as a day trader, but the required knowledge base and skill set can take years to develop.
Day trading is worth considering if you’ve put in the work to gain expertise in the space. It’s not a cheat code, hack, or magic bullet. It’s a shark tank–and you can very well become one of those sharks if you follow the appropriate steps.
How To Increase Your Chances For Success While Day Trading.
Now you know the risks involved in day trading, but this article isn’t meant to dissuade you. Rather, we’re here to help with tips to help you mitigate the risks and hone into the high-reward aspect of day trading.
Apply Effective Day Trading Strategies To Increase Your Chances Of Success.
An ironed-out strategy will dictate whether you succeed in day trading. This strategy should be highly analytical, data-backed, and have plenty of foresight.
Ensure your day trading strategy applies to all facets of trading, including:
- Your desired trading market.
- Your specific methods and approaches.
- Your trade management technique.
Also, be mindful of the time frames involved in your process. For some, it can be 15 or 30 minutes. For others, it’s an hour. Those who dare to be bold will test strategies beyond the parameters of conventional trading hours.
You’ll also want to determine a defined position and clearly established risk parameters.
Treat Day Trading As A Full-Time Job.
Stocks and investments don’t have to be a full-time pursuit–but not all these forms of investing and stock trading are day trading.
By definition, day trading necessitates trading four-plus times over five days. It’s the only way to qualify as a day trader. Making such a high volume of trades at a profit requires you to closely monitor the stock market and make same-day stock trades, purchases, and sales.
The substantial financial risks and monetary investments you must make as a day trader calls for an expert touch you can only develop with a more professional approach.
These are the general tasks you’ll need to perform as a day trader if you wish to minimize risk and execute profitable trades:
- Staying on top of daily market trends to stay ahead of the curve and conduct profitable, quick turn-around trades.
- Insightfully and strategically funding trades from your personal account.
- Buying stocks intuitively–having the knowledge to make an educated guess that they’ll perform well.
- Gaining a firm grasp of varying financial securities.
- Adapting quickly to sell stocks that are likely to drop in value.
How Much Time Should You Spend Working As A Day Trader?
Many day traders work at trading firms. They’ll perform transactions side-by-side with other day traders at a specific work location–usually an office. The profession is known for offering flexible hours. Nonetheless, most traders work daily to stay on top of trading opportunities in their infancy. Being tapped into the daily market allows traders to move with agility and velocity.
Day trading can also be an independent pursuit. You don’t need to trade through an investment firm. Instead, you can maneuver from home or coffee shops/libraries with internet access.
Even if you are an independent day trader, working full-time hours to keep your edge is suggested. That means around eight hours per day, if possible. Of course, you don’t want to burn yourself out–because that will impede your ability to succeed and heighten your risk. Still, you want to ensure you’re putting in enough time to give yourself the best chance at success with your day trading strategies.
Combine Working Smart With Working Hard.
Hard work is crucial to any profession–but it has its limits. You can work hard but focus all your efforts on fruitless endeavors. Conversely, you can work a bit less–but with insightful day trading strategies–and experience far more success than only getting by on sheer grit and grind.
A crucial component of working smart is course correction and education. You can’t know how to fix flawed trading strategies if you’re unsure how you’re misstepping.
For instance, joining Sniper Trades grants day traders access to a learning and growing space they’ll share with like-minded individuals. Our education content includes charts and technical analysis. We also interpret macroeconomics and analyze options flow, account management, and trader psychology.
Contact us today if you’re interested in day trading but want to mitigate the potential risks.