What is Day Trading?

Definition and introduction:

A daytrader does not read balance sheets and does not analyze business reports. Rather, he tries to take advantage of short movements of the stock market prices several times a day by means of technical chart analysis and special strategies. By “shortening” (i.e. selling empty) it is possible to earn money on falling prices. The trading instruments used are shares from all over the world, derivatives, currencies, and CFDs.

Daytrader at work

What you should know about day trading:

  • It is highly competitive
  • Day traders do not open positions overnight
  • Day traders profit from small price movements
  • 85% of all day traders lose money or even more

The press often paints a false picture of traders. Day trading is portrayed as gambling, often you will read reports of people who have lost their homes with it. Classic long-term investors insist on wisdom such as “back and forth empties pockets” and point to the poor success rate.

In fact, statistics say that over 85% of all intraday traders lose money. At first glance, this is daunting. But if you look at the facts more closely, you will see that this figure does not reflect some important things. Many beginners do not take the time to learn day trading properly. They get themselves an account with a broker, transfer perhaps times 100 dollars, click a little in the trading platform around.

Quickly the first trades are fired without knowing the background or strategies. With a small amount of money, you can’t do reasonable risk management, although this is the most important point for every trader. And the result? The deposited money is quickly gone, the beginner gives up and goes into the statistics as a loser.

How do day traders earn money?

Let’s take a look at a chart of a stock and see how the price development within a single day is. In the picture you can see very well the possibilities to earn money by intraday trading with Amazon share.

The market opened due to great economic news higher than expected with a gap up. Also, the volume was very high and a lot of traders bought the share at the open. You can see the volume is rising and the price too. A perfect setup to follow the trend.

The trade could be closed when the market began to consolidate and building up a range. This was just a short overview of a possibility day trading setup for earning money.

Amazon Day Trading

You cannot assume that you will always find the optimal entry and exit points and take the entire fluctuation range with you. The example nevertheless shows the earning potential. But be careful: In addition to quick profits, quick losses are possible. Risk control by setting so-called stop-loss limits and trading small positions is important so that you do not become part of the loser statistics.

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Factors for your success as a daytrader

Fast market access

Many brokers offer comprehensive solutions via the Internet and thus access to all important national and international stock exchanges in real-time. It is possible for you to trade to the second, just like professional securities traders.

Costs

The amount of transaction costs is of no small importance in this context. American suppliers are usually content with 2 to 5 US Dollar flat rates for one trade. German banks, on the other hand, charge a commission when processing a buy or sell order in German markets. Depending on the order volume, this means a considerable price difference for the customer. You can find a favorable broker in our broker recommendation.

Risks

Day trading offers disproportionate chances of profit, but the risks are significantly higher than with conventional investments. Remember that a total loss of the invested capital is possible, especially if you do not follow some of the basic rules. Day trading is certainly not suitable for everyone.

Personal attitude

Anyone who sees day trading as a way to get rich quickly and easily will sooner or later start gambling instead of trading – this is a sure way to ruin. You should be aware that day trading can be a job like any other. Even if you study the subject intensively, it will take you quite a while to really understand how the business works. As soon as you see it as “gambling” and as a big roulette game you should close your account and save the money. But with patience and diligence, almost everyone can learn day trading.

The biggest mistakes of daytraders:

These fast trades require completely different strategies than the classic “Buy & Hold”. The trader does not analyze balance sheets, attend general meetings, or study annual reports. The trading is very technically oriented, the trader is looking for movement. Ideally, you do not hold positions overnight and thus minimize the risk.

This all sounds very good, but why do 80-90% of all day traders go broke? There are certainly many reasons, but some you hear again and again from failed traders:

1. Lack of expertise in day trading:

In the beginning, trading looks so easy, one mouse clicks, and the paper is bought. When it rises you make money, anyone can do that. The disillusionment comes quickly, with falling account balances the trader realizes how little he knows about the mechanics of the market and about trading strategies. Like every profession, trading requires training and a period of learning.

2. Lack of capital:

Due to the high leverage offered by some brokers, many beginners are tempted to the fallacy that one can comfortably live on 10,000 Euros or less trading capital. Therefore, they take high risks in order to generate their required monthly income. This is a sure path to ruin.

3. Lack of discipline:

This is probably the number one reason for traders’ failure. Many try to get “their” money back after losses, increase their stakes, and go from trading to wild gambling on the markets.

4. No trading plan:

Would you invest many thousands of Euros in a company that has no business plan? Then why do many traders assume that such a thing is completely unnecessary? A trading plan lists all strategies for events in the market and defines your risk and money management strategy. Many traders save themselves this trouble and leave out the trading plan, often with disastrous consequences. An old trader proverb says: “Fail to plan and you plan to fail”.

Conclusion: Now the good news

It is possible to overcome all these points and trade profitably. Don’t give up, learn the basics, the strategies, and watch the current developments. Do not see trading as a game of chance, but as a profession. The first step is to create a trading plan. If you want to learn more, read how you can learn day trading as a beginner.

Good luck.


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