Day Trading Risks
Day trading, as previously mentioned, can be very risky. The bottom line is that day traders should not risk the money that they cannot afford to lose. Again, it is your money on the line, not a company’s, so you need to be sure you feel comfortable with your knowledge of the market. Therefore, it is imperative that you have the discipline and work ethic to see this endeavor through; and you need to be your own supervisor. You need to have an internal system of checks and balance to make sure you don’t take too many risks or begin to overtrade. You need to learn how to take a loss, because losses will occur, especially at the beginning stages. The rewards of day trading are high, but so are the risks.
Possibility of Large Losses
Depending on the decisions made during the day, a trader could hundreds to thousands of dollars. You should be prepared to suffer severe financial losses; this is part of the process.
Many novice day traders suffer severe monetary losses in their first months of trading, and some don’t stay in the game long enough to see a profit. Most day traders abide by an important creed: only risk the money you can afford to lose.
Demands of Day Trading
Day trading requires a lot of time and attention paid to the markets, and their trends and daily activities. A lot of focus has to be put into the market hours, which requires plenty of time in front of the computer screen ready to execute a trade at the drop of a hat. In addition to the time commitment, day trading requires a lot of study outside of your trading hours. An intensive amount of knowledge is needed in order to be successful at this highly demanding profession.
Stress is part of every day trading job. This isn’t only due to the possibilities of large losses, but also because of the idea that a lot of individuals in the investments field view it as gambling.
Like watching a sports team you bet on, day trading can cause high levels of stress and anxiety waiting for a stock’s price . In addition to this, the job requires that you make quick decisions concerning the acquisition or selling of securities, with intensive time constraints.
Overtrading can come in two forms: 1. Taking too many risks/making too many risky trades, and 2. trading too large shares. Beginning day traders typically get overwhelmed with the fast pace of day trading and let their emotions, instead of their knowledge and analysis, make the decisions for them.
Stock Trade Commissions
Although many day traders deal with direct access brokers and many online day trading sites offer low commissions, it is possible that commissions will interfere with your ability to make a serious profit. Due to the rapid fashion of trading, and the large volume of trades (each trade carries with it a commission), a lot of money from your profits – or out of your pocket – will go toward commissions.
Example: For a $10 commission per trade, a quick buy and sell transaction would cost $20. This would be 20% of a $100 profit, or 10% of a $200 profit.
Day traders rely heavily on borrowed money or buying stocks on margin (collateral held to cover the risk of the trade). Borrowing money to trade stocks always holds some risks. Day traders utilize the leverage (borrowing money to supplement existing funds for a greater return) of borrowed money to increase returns. If not successful, this could lead to the trader losing large sums of money, and possibly an accruement of debt. This is why it is very important to have knowledge of the basics of day trading before venturing into the field.
Understanding Market Trends
The focus of a day trader’s day is sitting in front of a computer screen and watching for stocks that have some movement. They tend to follow a stock’s momentum and make a quick transaction before it changes course. Since day traders do not know for sure how a stock will move, it is very important that they have knowledge of market trends and financial and investment analysis. Among these important trends and tools of analysis are technical analysis, market and investment charts, and speculation. If this knowledge is absent form a day trader’s skill base, then this endeavor becomes even riskier than it already is.
Under the rules of NYSE and NASD, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts. Some other restrictions can apply to day traders. Consult the SEC (Securities and Exchanges Commission) website for more, extremely important, information.
Starting out as a day trader can cost a lot of money out of pocket. In a sense, you can already begin your day trading career in the red. These expenses can include: software (and hardware), commissions, manuals, and other resources. It is very important to develop a budget for these out-o-pocket expenses before entering the arena of day trading. These expenses could increase once you move forward in your day trading career.
Record Keeping and Taxes
As a day trader, you are in business for yourself. So, in addition to being the boss, you are also the accountant; the full-time accountant at that. You will need to be aware of transactions made and money earned, and every April it will be your responsibility to check those records to properly give Uncle Sam his share. Some day traders, depending on income, are subject to self-employment taxes.
Simply put, power outages, software/hardware issues, disrupted internet connections. It could happen.