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Why You Should Be Cautious of Day Trading

Over the past few months, the amount of people day trading has seen a dramatic increase. It makes sense. People are working from home, have more free time, and want to make some extra money. There are also many people who have lost jobs due to the pandemic and have decided to turn to the markets as a new source of income. While we’re all for people having side hustles, this one in particular should be approached with an abundance of caution.

What Is Day Trading

First, let’s break down exactly what day trading is. Day trading can be defined as the opening and closing of a security position within a single trading day. This can be done in two ways. You can either buy first (going long) to open a position then sell it to close out or sell it first (going short) then buy it back to close the position. These types of trades can take place in any financial market but are most commonly practiced in the foreign exchange, options and stock markets. 

Large Amounts of Capital

In just one day of trading, you can easily fluctuate between losses and profits. Successful day trading can bring you quick gains but statistically speaking, losses are more likely to occur. Due to the nature of day trading, a common strategy is purchasing (or selling) large security positions which enables you to take advantage of minimal fluctuations in the price. If the price moves in your favor you can profit very quickly but this requires more capital than the average investor has to risk (or should be risking).

Huge Time Commitment 

Learning how to read, interpret and most importantly, time the markets is difficult. Securities are extremely volatile. With the influence of headlines and tweets, markets can be instantly affected in ways like never before. This constant volatility means you need to treat this like a full time job. You need to be ready for the inevitable market fluctuations, especially if you’re an inexperienced day trader. Many people think they can watch a few videos or read a few books to become proficient, but this is a big misunderstanding.  It’s just not that simple. Without the proper experience, you might find yourself looking for another side hustle.

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