Say no to day trading !

Day trading (or intra-day trading) is the practice of buying and selling stocks during the same day. Ideally at the end of the day there has been no net change in your position. Your trading summary would show equal number of share bought and sold. A gain or loss is made on the difference between the purchase and sales price.

Day trading is more risky than any other trading activity. It is very common to use margin with day trading (i.e. using borrowed funds), amplifying gains and also amplifying losses. The downside is that substantial losses can occur very quickly.

Day trading was once the domain of financial firms and professionals along with experienced traders and speculators. It is now very common amongst everyday traders thanks to the internet.

There is a common misconception among stock market participants that they can catch those fluctuations in price and make a regular income out of it everyday. That’s far from truth. A little “gambler’s instinct” is there in all of us and it is this urge to react instinctively to any positive or negative market information that finally becomes an addiction. It goes on and on until the gambler himself is out of the game. (In fact, you’ll realise that you’ve been a gambler only when you look back at what you’ve done !)

There are also some analysts around who gives out messages at the end of the trading day that their stock calls have made heavy intra day profits, everyday ! Claiming to have made 90% or more accurate stock calls every day, their purpose is to lure you to subscribe to their paid services. The genuineness of these kind of sure shot calls is questionable.

Day trading is also promoted internally by most of the broking firms through their branch managers and relationship officers , since it helps to generate their target brokerage every month.

Although these are the dark sides of day trading, i do admit that there are some very genuine day traders out there.

STRATEGIES ADOPTED BY DAY TRADERS

There are a number of strategies by which day traders attempt to make a profit.

Following the trend:

Trend following, a day trading strategy used in all trading time frames, assumes that prices that have been rising steadily will continue to rise, and the same for falling prices. The trend follower buys a share which has been rising or short-sells a falling share, in the expectation that the trend will continue.

Fundamental analysis:

Fundamental analysis is one of the biggest tools of the day trader. The basic strategy is to buy a share which has just announced good news, or short-sell a share on bad news.But to be honest, i haven’t seen many day traders who follow a stock fundamentally. Many ignore company fundamentals, focusing only on what might make the stock move in the very short term

Technical analysis:

Technical day trading uses mathematical formulae to decide when a share is going to rise or fall based on previous price action. Many day traders use technical indicators

DANGERS OF DAY TRADING

Many Day traders trade without a plan of any kind as to what to buy and sell and when. In many cases a day is simply not long enough to realize the profit of a share.

Much of the fundamental analysis data day traders’ use is quite delayed and this will mean that by the time it is received and acted on, the rest of the market, especially the stock broking industry, has already taken action.

Day trading in stock markets has the same lure to traders that Las Vegas has to gamblers. Typically, a new trader will come to the stock markets with a trading strategy of holding shares for a period of weeks or months. As they watch the markets move up and down every day, they believe they can catch many of these smaller moves by getting in and out every couple of days. Commissions are cheap, so it seems like an easy proposition. But, things are not easy as he thinks. Every other trade might end up in losses and at the end, he would realize that he would have done very well if he just stuck to his original plan and his life would likely have been much less stressful. The above scenario is a daily occurrence in most of the stock broking firms.

Day traders often use leverage which can amplify losses as much as it can amplify gains. For the inexperienced it is a huge risk losing more than you have in your float.

CONCLUSION

Day trading may look like investing, but it’s far from it. Day trading can be very emotional and gut-instinct based. It might give opportunities to make profits. But we sincerely suggest not to do day trading in stock markets. Often, investors do this to make a quick buck. From our experience, 80%-90% of day traders lose money in the market. Resist articles you may see here or there profiling a successful day trader. Know that for every success, there are many more failures. Don’t let yourself or those you care about get sucked into day trading.

You may like these posts:

  1. Investing vs Trading vs Speculation
  2. Understanding the online trading software
  3. Theory of Price Gaps

1 Response to “Say no to day trading !”

Sharetipsinf

October 21, 2011 at 10:05 pm

When market is bullish everyone want to join stock market and wish to start trading but in bearish market condition why every one is scare of joining share market?
We believe bearish market is as good as bullish market. Traders can get many trading opportunities in both types of trends.
Regards

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