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Many investors fall in love with the idea of day trading.
They think you can spend a few hours a day trading stocks and make huge amounts of money.
While day trading can be a lucrative endeavor, but it is not without its risks.
In this blog post, I cover the pros and cons of day trading so you can see if it is right for you.
Table of Contents
12 Big Pros And Cons Of Day Trading
Day Trading vs. Swing Trading
Before getting into the pros and cons of day trading, I want to cover the differences between day trading and swing trading.
You will hear people talk about both these concepts together, as they are closely tied but are different and it is important to understand their differences.
Day trading simply means you are making multiple trades a day, mostly for small profits, using technical analysis.
In some cases you can achieve very high returns.
The day trader uses stop orders to limit their potential losses.
They also do no hold positions overnight.
Swing traders on the other hand are traders who identify swings in stock prices and uses these to their advantage to make money.
For example, a swing trader might see a lot of trading volume on a stock and take a position in it to profit from it.
A swing trade can develop quickly, but the swing trader usually holds stocks overnight and even for a few days or weeks.
Now that you know the difference between swing trading and day trading, let’s look at the things to consider about day trading.
5 Pros Of Day Trading
Day trading can be very enjoyable.
Here are the pros of day trading that make people want to be a day trader.
#1. Day Traders Can Make A Lot Of Money
While day traders main focus is on small profits from buying and selling stocks multiple times in the same day, these profits add up.
If you can make 10 trades a day and they earn $100 return, you make $1,000 a day.
Over the course of a week and you have $5,000.
Of course, not every trade made will be profitable, but smart traders know that a small profit adds up over time.
For me, I was making roughly $100 per trade on average.
Mixed in there were losses and some really big winners.
Over the course of a year, I earned a profit of close to $15,000 trading a few times a week.
#2. No Overnight Risk
Since day traders don’t have and open positions once the market closes, there is zero overnight risks to them.
Many traders and investors are not aware of the various risks they can be exposed to overnight.
For example, after the close, a company could report bad earnings or come out with bad news.
The result is the next morning the stock opens negative.
Another example could be a bad economic report or news of a natural disaster.
Because of these factors, it is critical that if you want to be successful at day trading you avoid overnight risk.
#3. A Day Trader Works For Themself
One popular reason people love becoming day traders is that it allows them to be your own boss.
You don’t have to report to anyone but yourself.
While you can get the enjoyment of being your own boss by starting a business, many businesses will end up needing to hire people in order to grow and stay competitive.
With day trading it is the complete opposite.
You never need to hire anyone.
You can do all the trading you want all by yourself.
Additionally, as you get better at day trading, you could earn enough money that it becomes your full time job.
The nice thing though is that you could choose to work it on the side and have the profits be additional income or you could make it your full time job.
Finally, there are no long hours at the office.
Most day traders only work while the market is open, so they are done by 4pm.
#4. Variety Of Trading Strategies
Another benefit day traders enjoy is there are several trading strategies they can use to make money trading stocks.
You could do technical analysis where you do technical trading, or you could use a breakout trading strategy, or even counter trend trading.
And depending on the market, you might find different trading opportunities with all of them.
At the end of the day, as long as you have a solid trading strategy that you know well, you can be successful at day trading.
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#5. Instant Results
If you are someone who needs instant results, day trading could be for you.
Since you are making trades quickly, you see your profit or loss within minutes or hours.
You don’t have to wait months or years to see the fruits of your hard work.
This appeals to many people, especially today in our instant gratification society.
7 Cons Of Day Trading
There are many benefits to being day traders.
But there are also some drawbacks.
Here are the biggest downsides to being a day trader.
#1. Need A Lot Of Money To Get Started
Most day traders can start off without needing a significant amount of money.
However, if you meet a certain guideline, known as the pattern day trading rule, you need to have a minimum of $25,000 to invest.
This rule, commonly known as PDT, states that if you make four or more trades in a five day period and these trades make up more than 6% of the trades in your account, you need $25,000.
Understand that the four or more trades are day trades, where you buy and sell in the same day.
Also note that this is the minimum requirements and some brokers have more strict guidelines.
As a result, it is important to reach out to your broker before you begin to trade.
With that said, you won’t get into serious trouble if you try to trade without the minimum requirement.
What will happen is your broker will reach out to you and inform you of the issue.
Most times you can continue to trade, though you have to be careful to not make more than four trades in a five day period.
If you do, you risk having your account frozen for 60 or 90 days.
When I was trading like this, I didn’t know the rule.
I placed a few trades and my broker called me to let me know I needed I needed more cash in my account and if I kept trading without adding more cash, they would stop me from placing trades for 90 days.
#2. Requires Research
One big misconception with day trading is you can do it for a couple of hours and make a lot of money.
But to be a successful day trader, you need to put in a lot of hours not only researching individual stocks, but also the market.
Getting comfortable with financial information that companies release is also important.
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The more you know about these things, the better your long term results will be.
#3. Can Lose Money Quickly
One of the most important rules of day trading is using stop loss orders to protect yourself from losses.
When many day traders start day trading, they follow this advice perfectly.
But as they get more comfortable with the intraday market price action, they become lax.
As a result, day traders typically suffer severe financial losses at one point or another.
The good news is that this is enough of a wake up call that they start using stop loss orders again.
#4. Risk Losing More Money With Margin
Once day traders get to a certain level of comfort, some opt to open a margin account.
This is basically a loan from the broker to the trader that allows them to invest more money.
The money borrowed is done so at a reasonable interest rate, and the collateral is the underlying assets in the account.
The issue with margin is that while you can dramatically increase your profits, you can also lose a lot of money too.
For example, if you borrow $10,000 to day trade a stock and end up losing $5,000 on the trade, you now are in the hole $15,000.
Because of this, traders need to be able to limit their own risk they take on when using margin.
#5. Emotions Can Trick You
Day trading can give you an adrenaline rush that most other things can’t.
The thrill of placing a trade and making a profit on short term price movements is similar to the rush you get when doing more extreme sports.
As great as this feeling is, it also opens you up to high risk of losses.
You could overthink a trade or stay in a trade too long because your analysis was flawed.
Or worse, you have a gut feeling that something is going to happen even though your brain is telling you to cut your losses and sell.
Because of this, it is important to work on keeping your emotions in check as traders.
#6. Can Be Addictive
Closely related to the above point about trader’s emotions is that day trading can become addictive.
You are always looking for the next stock to start trading and if you are not careful, it can overtake your life.
Another example could be you make a day trade or two in the morning and lose money.
You don’t like the feeling of losing money so you decide to place more trades in the hopes of making back your losses.
This can work out, but it could also cause you to lose more.
For example, there was one stock I traded and lost money on.
I got upset with myself and decided to revenge trade it again, hoping to make money.
It worked out for me in the end as my gain exceeded my initial loss.
But I quickly realized it could have gone the other way.
Now I have a note on my computer monitors reminding me not to get sucked into trading this way.
It is important to be able to draw the line and walk away from the stock market every now and then to ensure your new hobby doesn’t become a crutch.
#7. Is Time Intensive
Finally, day trading is intensive, stressful, and requires a lot of focus.
Because the stock market moves so quickly, if you have any open positions, you have to be monitoring them at all time.
Just walking away for a minute could be disastrous.
This happened to be one time.
I didn’t place a stop loss on a stock and ran to the restroom.
By the time I came back, the stock reversed momentum and I went from a profit to a significant loss.
While you don’t have to watch the market if you don’t have any open positions, if you do, you need to stay on top of things.
There are the biggest pros and cons of day trading you need to know.
While it is not for everyone, it can be fun to day trade stocks.
My advice to anyone looking to get started is to take things slowly, as you can lose a lot of money fast.
You might even consider opening a paper trading account that allows you to make real life trades without risking your capital, all at your own pace.
This helps you to better get a feel for the stock market works and can help you be a better day trader.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.