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15 Things To Know Before Starting Day Trading

16 January 2021

Before We Get Into the River Rafting Day Trading Is, It Is Important to Buckle up. Here Are 15 Helpful Tips.

Welcome back Aluxers. No, this isn’t another spammy video telling you we’ll help you become a millionaire if you set up a day trading account but if anything, we’re going to tell you pretty much the opposite.

With more and more trading apps making it possible to trade with a few swipes on your phone, it looks like day trading is fast becoming the new way of earning money from home — making all your financial worries go away — and pretty much promising you the world and then some more. Are you really going to believe all of that? Well, we’ve done our homework, and we’re going to spell it out for you

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Every minute saved in a day, is more than money for a day trader. It could be gold! So begin creating that habit now, and switch out to the video version of this article:

With that trade in place, let’s get back to the topic.

1

Day Trading Is Completely Different From Investing

Investing means getting behind something you think has potential, sticking with it, and hopefully watching it grow. Day trading isn’t that.

Day trading is a type of swing trading, so it is about making short-term trades on stocks, commodities or currencies, betting on the price going either up or down in that narrow time frame. And well done genius, you’ve figured out from the name, day trading is the fastest kind of swing trading — opening and closing the trade on the same day.

Doesn’t quite fit the definition of investing and many of the world’s greatest investors agree. Like Warren Buffett, and Shark Tank host, Kevin O’Leary, who says ‘Day trading is not investing. Day trading is gambling. Nothing wrong with it. Nothing wrong with Las Vegas either. But it’s not investing.’

2

It’s High Risk

True, you have a shot as making a nice pile of cash in the short term but unless you’ve got a lot of experience, it’s not a good chance — at all.

With investing, if you have a solid reason to believe an asset has good medium to long term prospects, and if you’ve done your homework, then you have a good shot at it.

But betting on which way the market’s going to move over a few hours, or minutes — that’s a tough call. Don’t believe us? Just spend half an hour watching markets on a stocks website and see how unpredictable their short-term movements are.

No surprise then, that 97% of people who get into day trading end up losing money. So be aware, the odds are stacked against you — heavily.

3

Many Successful Day Traders Work for Large Institutions

But Aluxers, somebody’s gotta be making money from it, right? Or it wouldn’t be a thing? True. Some do make a lot of money out of it. But let’s take a look at who they are.

A lot of them are professional traders at large institutions, like insurance or pensions companies. Or high-net worth individuals who invested a lot in training, hardware and software. And they have quite a few aces up their sleeve that the average trader doesn’t.

Like, a pro trading desk — which does trades in split second, important when markets are moving that fast. Real time access to market data.  Huge amounts of capital. Analytical tools to crunch numbers and find the best opportunities. And even with all those things working for them, even the pros have bad days too.

 

4

It’s a Zero Sum Game

Here’s another way day trading is different from long-term investing. Let’s compare it with index funds — or even individual stocks. With these, a large number of investors can make solid gains over a period of time.

In day trading, it’s different. One person wins, another loses. When you bet on the market going up or down, somebody’s gets it right, and comes out in profit. Somebody else bets the other way and loses. Sounds like a 50/50 chance? Factor in timing it right, paying trading fees, and taking leverage into account — we’ll get to that later — and it’s a lot worse than a 50/50 chance. Sure, you’ll get lucky on a trade here and there, but most people can’t keep it up for long. And surprise surprise, it’s nearly always the big boys and girls from the institutions, or experienced investors who make all the gains.

5

More People Than Ever Are Doing It

What’s happening right now is there are more and more online brokers, like RobinHood, eToro, that let you trade from your smartphone, and make it easy for anyone to trade. For long term trades, they’re reasonable options. But think you can be a casual day trader on them — it’s probably not going to end well.

The pandemic has meant more people working from home — more people with financial problems looking for a quick fix and more people just plain bored, who’ve finished all the games on their console, and think they’ll try eToro next.

According to the Wall Street Journal, Robinhood got a record three million accounts in the first quarter of 2020, and others have been seeing the same kinds of figures. But try doing this when you have money problems, and you’re almost certain to be digging yourself in deeper.

6

There Are More Get-Rich-Quick Schemes and Scams

So it’s easier than ever to get a trading account and there’s big bucks involved. Put that together, and what do you get? Yep — your Facebook feed filled with scammers, telling you how you can make a million in a few months.

People selling courses that guarantee success — as if there’s such a thing as guaranteed success in day trading. People who say they’ll trade for you, or give you mostly accurate trading signals. If they were that accurate, why don’t they just trade themselves and earn their millions that way?

And the trading platforms are getting in on it too, who are making it look like it’s easy. They need people to set up accounts, and making day trading look easy is one way of reeling you in.

Before you sign up and get trading — be aware of the realities, and of what you have to do to have a chance of making it work.

7

To Make It Work, You Need to Be Fully Invested in It

True, besides the institutions, that are a small number of individual investors who make it work. But there are some checks you need to do first — which the scammers always forget to tell you about. First — realize you need to be fully invested in it.

Think you can do a few day trades on the side, and watch the markets on your phone while you’re doing your main job? Nah, that’s not going to cut it. Do it part time, in evenings?

The fact is, you’ll need your eyes glued to the screen — or a number of different screens — for as long as the markets are open, if you want any chance of spotting opportunities to open trades, or know when to close them.

Remember — unless you consider burning cash as a hobby, day trading isn’t going to qualify as a hobby. To make it work, approach it like a full-time job.

Does it take a lot to get absolutely involved into things? Considering one or all of these 15 Ways To Build FOCUS can help. 

8

It Requires Experience

So, you know a bit about how the stock market works? Nope, that’s almost certainly not enough. Think you can buy a couple of books and get going? Ha-ha, that’s a good one. Take an online course somebody spammed you with. Stop, you really got us laughing now.

The people you’re going to be competing with are highly trained, and experienced. You’ll need to be as well. One way you can get experience is by trading in a dummy account, which you can sign up for on a lot of financial websites. Get going with that, and don’t even think about real trading until you’ve done several months, or even a year with a dummy account.

9

You’ll Want to Be Good at Technical Analysis

You know those green and red sticks on financial charts — as insiders call them, candlesticks. Reading those is what they call technical analysis. Knowing what they mean, how to recognize patterns, and what signals they’re sending you. Pro traders use them to predict what markets are going to do so you’ll need to learn about them too.

There are plenty of courses out there on how to use them but check reviews of those courses before you sign up for one — don’t just go for the first one you get spammed with.

10

You’ll Want Access to Real Time Financial Data and Multiple News Sources

You’re going to want news sources that give you the latest announcements that are going to affect markets. News about corporate earnings, interest rates, company scandals, mergers and acquisitions — all of these can send prices shooting up or down. And that’s where a lot of your opportunities will come from.

So you need to be the first to know when something important happens. When we say the first, we mean, not a time lag of a few seconds. The pro traders are going to be making decisions in a split second. And to compete with them you’ve got to react just as fast.

11

You’ll Want to Invest in Analytical Software

Something else the pro traders have. And you should look into at least some of them too. Things like: software that interfaces directly with the brokerage, and lets you make instantaneous trades. Automatic pattern recognition, to identify indicators of what direction an asset is going to go in. Back testing, which allows traders to see how a certain strategy would have performed in the past, and helps them to predict how it will perform in the future.

Sounds complicated? Well, who said day trading was going to be simple?

12

You’ll Need Discipline — and You’ll Need to Keep Emotion Out of Your Decisions

Day traders who make money use tried and tested strategies and follow them to-the-book but hesitate a few seconds in putting those five thousand bucks on a trade — you may have lost the opportunity. You need to be sure of your strategies, and be disciplined in following them through. It doesn’t mean you’ll win every time but for successful traders, it will help them make more wins than losses.

And for a lot of people, keeping emotion out of it isn’t easy because it’s their money on the line. That’s one reason day trading just isn’t for everybody — no matter how market-savvy you are.

13

You’ll Probably Need to Use Leverage — Which Is Very Risky

Leverage means borrowing money to make trades. If you put a thousand dollars on a trade, and it goes up 10%, you’ve made 100 dollars. But if you use leverage, and along with your own money, you borrow say, another nine thousand — you can give back what you borrowed and you’ve still got 500 dollars profit.

What about the reverse? Well, it ought to be kind of obvious. But we’ll spell it out for you. You’ve borrowed $9000 along with your $1000. If it goes down by 10%, your trade closes, you automatically pay back the money you owe and your $1000 has disappeared. No option of waiting for the price to go back up so yep, you’re left with nothing.

The truth is, if you want chances of making good money in day trading, you’ll probably need to use leverage and it’s something else that makes day trading inherently risky.

14

In Us Law, You’ll Also Need $25 000 in Your Account to Do It

Different countries have different laws set out by their financial authorities. Before you get into it, find out what they are. And in the USA, in order to make four or more day trades within a week, you need to have at least $25 000 in your trading account.

Got that kind of money you can afford to blow if it all goes wrong? Well, be our guest. If you’d rather be sure of holding onto your $25 000 — maybe day trading isn’t for you.

15

Day Traders Should Only Use Risk Capital

Risk capital means money you’re prepared to lose. Remember, you’re up against big financial institutions — like insurance and pensions companies. They have their investments over a spread but most of this money is in low-risk assets — like index funds and mutual funds and some of it is medium-risk — like individual stocks and a small part of it at the high-risk end — that’s what their teams of day traders take care of.

Which means that for those huge companies, the money they day trade is risk capital but they can afford to lose it, because they’ve got their gains covered elsewhere. Most individuals aren’t in such a comfortable position.

Question:

What — if anything — did the words ‘day trading’ mean to you before you clicked on this video? And has this changed your opinion about it?