It’s a rare investor who doesn’t want to make high returns and maximize their profit within the shortest possible time.
One way to achieve this goal is to get into day trading, which is lauded for its potential for huge and quick returns. Nevertheless, the cases where traders succeed at such undertakings are still few and far between because of the dire risks day trading is packed with.
That said, the number of people eager to give this method a shot is only growing by the day. How come no risks or potential financial losses can put day traders off what they are doing? And how does day trading stack up against its long-term investing counterpart?
Let’s find out.
Table of Contents
What’s Day Trading?
So, what is day trading? Just as its name suggests, it’s a type of trading where a trader performs financial transactions in an attempt to capitalize on the intraday volatility of certain stocks.
In simple words, in day trading, a person is going to buy or sell contracts, stocks, securities, or cryptocurrencies over the period of a single day’s trading. This involves moving in and out, and the goal is to take advantage of small fluctuations in price leveraged by large investments to make a profit.
And the availability of reliable online trading platforms and apps makes trading a breeze these days. You can start simply by trying out the Pocketoption demo to experience the benefits of online trading first-hand.
Day trading can be done on the stock markets like Forex where fluctuations are easier to manage and leverage. Also, more and more trading is going on with cryptos like Bitcoin and Ethereum. So, what is the algorithm for making money from day trading? Let’s look at the following example.
Consider a security that fluctuates from, say, $100 to $101 in a given day. For a long-term investor, this small temporary difference in price may be meaningless.
However, if this trader was to buy $50,000 of this security at $100 and sell it later in the day for $101, the pure profit could amount to $500. Looks more than alluring, doesn’t it? But why do the majority of experienced traders agree that the risks of day trading normally outweigh the rewards, then?
Prerequisites for Successful Day Trading
Being successful in day trading requires a lot more than just randomly picking some stock and hoping it goes up at some point. Professional day traders normally rely on expensive software, sophisticated analytical tools, news services, and much more to find the best buying opportunities.
Moreover, they must also commit large amounts of time to the pursuit. Leveraging small fluctuations in price also requires hefty investments. In the example above, you saw the trader investing $50,000 to earn $500.
Should the price of the security go down, even this modest profit can evaporate. In the worst-case scenario, you may find yourself minus your hard-earned money.
Last but not least, keep in mind that day trading can be as addictive as gambling. So, watch out. Just like any other form of gambling, it can strip you of income and peace of mind, which is fraught with negative consequences.
That said, you shouldn’t let possible risks get in the way of your trading efforts. If you possess relevant skills, experience, and composure, which is crucial for successful trading, you can try your hand at this venture. But, in this case, you should be ready to go for broke as no market is immune to sudden fluctuations, which may leave you penniless.
What about Long-Term Investing?
Once we’ve reviewed the most considerable risks day trading may entail, it’s about time we took a closer look at long-term investment to determine whether it can be a viable option.
Unlike its day trading counterpart, long-term investing allows you to manage risks by evaluating companies or shares you’re investing in and help you buy your assets at the right price. And this increases your chances of earning the desired amount of profit.
So, if you want to reduce your dependence on market fluctuations and your time commitment to trading efforts, investing for long periods might be your best bet.
Despite all the evident benefits long-term investing comes with, you should keep in mind that there’s no such thing as a 100% guarantee when it comes to business, especially such a risky business as investing.
The important thing is to weigh up the pros and cons of both day trading and investing for the long haul. This way, you’ll be able to pick the strategy that can best align with your individual goals and financial capabilities.
