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Is Day Trading Profitable?

Contents

Day trading is the buying and selling of financial instruments within a trading day. Day traders always close all their open positions before the market closes for the day. The traders speculate on the prices of selected assets with the hope of making profits from the short term fluctuations in the prices. Day trading is very popular in the forex, CFDs and stock markets.

History

The history of day trading can be traced back to America in 1867 when stock brokers collated several ticker tapes from market speculators. With the help of the predictions on the ticker tapes, some brokers were able to day trade in the New York Stock Exchange (NYSE). In 1971, the Electronic Communications Network (ECN) was created and it enabled stock brokers and even non brokers to access the stock market and day trade. When fixed commission was scrapped in 1975, stock brokers began offering discounts and new trading systems were developed. More traders accessed the market and day trading increased in popularity. The advent of the internet and online platforms in 1997 brought day trading to the individual trader. Individuals now have opportunities to access the financial markets from their homes with very small trading capital. This has largely popularized day trading and also created a new group of traders known as professional day traders.

Strategies

Most day traders develop and use their own strategies while others rely on trading systems or Expert Advisors (EAs). Here are some of the popular strategies utilized by day traders:

Scalping: This involves holding trade positions for a few minutes to a few hours in order to profit from small market fluctuations. Using this method, it is possible to take several trades in one single trading day.

Technical Analysis: Almost all day traders monitor the price actions of their favourite trading instruments on charts. The use of chart patterns, candlesticks and technical indicators to identify trading opportunities from the charts is the hallmark of technical analysis.

News Trading: Some day traders wait for market news, reports and major releases before they storm the markets to place their trades. The economic news calendar serves this purpose in the FX market.

Forex Robots: These are software that automatically open and close trade positions on behalf of the trader. They are useful for day trading.

Benefits

Here are some of the benefits enjoyed by day traders:

  • Day traders are not exposed to overnight risks and rollover charges.
  • The same capital can be used to open and close many short-term trades.
  • Leverage from the broker can be used to open trades that are much more than the day trader’s capital. This can largely increase the trader’s profits.
  • It is very easy to start and it is possible to make a lot of money within a few minutes. This is the main attraction of day trading.

Risks

Day traders are known to jump in and out of trades with the sole aim of making profits. Most of them lack a proper strategy, experience and knowledge. The following risks are involved in day trading:

  • Most day traders trade on a leverage. This means that they trade with borrowed funds from the broker. This is very risky because it magnifies losses when the trade goes against the trader.
  • Day traders are likely to pay higher broker charges and commissions. When they enter and exit a trade within minutes, by the time the broker commission is factored in, they hardly make a profit. This is common with trades that reverse in direction after a few minutes of trading.
  • Certain unforeseen eventualities such as power failure, software crashes, hardware failure, network failure, etc can be very detrimental to day trading. When any of these happen, the day trader may suffer a huge loss because the market may go against him in a jiffy and it will be impossible to remedy the trades during those downtimes.
  • Whey day traders identify an opportunity, they have to quickly make a decision on how much volume to trade, which direction, how long, etc. Day traders have a tendency to overtrade by placing too many risky trades or trading excessively high volumes in a bid make more profit. It is also easy to let emotions get in the way especially in an attempt to recover lost funds.
  • Most day traders follow the news and charts. They end up watching the market all day anxiously waiting for an opportunity to enter the market. This alone can induce stress-related health problems if not properly managed.  

Can Day Trading Bring Profit?

Day trading can be very profitable with the right approach. At the same time, it could be very risky. Statistics reveals that only 10% of day traders are successful. This is because of the impatience and psychology of many people that go into day trading. It has been proven that proper risk management, discipline and in-depth knowledge are required to become a successful day trader.

Day trading can be profitable under the following conditions:

  • When there is a trading plan: This is a set of rules that defines when to enter and exit a trade, among other parameters. It also includes risk and money management strategies. It takes a lot of study, research and back testing to create and perfect a trading plan.
  • When there is good risk management: A day trader must understand that the first aim of trading is to protect his capital; making profit comes second. Capital preservation must not be sacrificed on the altar of profit.
  • Adequate market knowledge: Most day traders who plunge into the financial markets to make fast money end up losing their capital. Traders must have adequate knowledge on how to interpret and trade the intraday market noise to produce results.

When there is trade discipline: This involves setting certain rules and sticking with it no matter the odds. It includes strict capital/risk management, trading times and setting rules when to exit the market even when on a winning trade.

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About the author

Kate Leaman

Kate Leaman

Kate Leaman is the Chief Analyst and author at InvestorGreg. She won the Sky News Fiona McDiarmad award and subsequently became a journalist for Sky News. Read more