Millions of investors actively trade stocks, forex, cryptocurrencies, and futures contracts multiple times per day, with a short-term holding period ranging from a couple of seconds to a few minutes.
The most frequently named benefits of day trading are independence, flexibility, and enormous income potential. This article explains the benefits and drawbacks of day trading
Day Trading Definition
The U.S. Securities and Exchange Commission (SEC) defines a day trader as an investor who frequently buys and sells securities during one day. If an investor exceeds three-day trades over a period of five business days, then he is considered as a so-called pattern day trader.
Being a pattern day trader requires the investors to hold a minimum of securities or cash of $25,000 in the trading account. As long the value remains above $25,000, the investor can proceed with day trading activities. Otherwise, the account will be locked for further day trades, and only open positions can be closed then until the minimum of $25,000 is available again.
More than 8,000 are listed on the world’s greatest stock exchanges – the New York Stock Exchange and NASDAQ. That’s why the U.S. regulations are well known. However, each country across the globe has its own rules and regulations about day trading. Therefore, investors need to research country-specific regulations before starting speculative day trading activities.
Getting Started With Day Trading
Those who already have a brokerage account often tend to start day trading even if they only have experience in long-term investing so far. This is risky since day trading is entirely different from long-term investments. Having proper education is the key to success. The best day trading courses, free day trader education on YouTube, and day trading guides provided by online brokerages are excellent starting points.
Becoming a day trader needs a reasonable time commitment, high net worth, and patience. Like education in other sectors, education in day trading comprises several modules and key components. For example, investors learn how to interpret intraday charts, read the order book, and learn what day trading strategies work the best in volatile market phases.
Day trading has become popular since major online brokerages in the United States like Charles Schwab, TD Ameritrade, and E*Trade announced commission-free trading for U.S. Stocks and Exchange Traded Funds. Investors who made 100-day trades per day often paid $5 per trade, so $500 in commissions per day. But today, the commission for 100-day trades is usually $0.
The Risks of Day Trading
Day trading is anything but simple. Advertisements might suggest that it is as easy as 1-2-3, and investors might think that the chances of success are at least 50%. However, various brokerage insights, statistics, and analyses provide a different picture and suggest that about 5% to 20% of all day traders make money, maybe even less.
A lack of education, too high self-evaluation, undercapitalization, and misinterpret market analysis techniques are frequently mentioned as the potential reason why day traders fail.
Opening a brokerage account in a non-regulated exotic part of the world is another risky venture. Investors who don’t meet the minimum criteria of $25,000 frequently tend to open a day trading account in less regulated parts of the world. There are two major risks involved with it.
· First of all, the potential lack of regulations can mean that investors might never see their capital again once they want to withdraw the money.
· The second risk is that such brokerages often have much higher fee structures. Funding and withdrawing money often costs horrendous fees, trading activities are often combined with high commissions, and the provided trading platforms might lack in terms of speed of trade executions.
Two Ways of Starting a Day Trading Business
The most frequent way of getting involved with day trading activities is by opening a brokerage account as an individual to make money day trading stocks, forex and other financial underlying. But there is another option with a day trading business perspective.
Investors who become a master in day trading theories and day trade execution can also start their own business selling products and services to other investors who are eager to learn how to day trade. Having a great website, excellent product and great reputation helps boost the income from a vendor side. Day traders who start selling courses and continuously provide proof of their success by publishing their brokerage statements are considered the most trustworthy business owners.
Day trading requires excellent skills in the financial markets. It is crucial to understand market behavior, technical aspects, brokerage platforms and order routing techniques. Experienced day traders say that a minimum of 6 months of studying and learning is required before a first day trade can be made with good probabilities of success. It is also essential to do the homework analyzing various brokerage accounts and trading platforms before funding an account.