The Trader Lifestyle Series - The Pros and Cons of Day Trading
Want to start trading?
Many people do. For them, it’s a dream come true.
You work for yourself, and using your own money. You trade what you want, and without anyone restricting you…
You make enormous amounts of money, you are free to travel and do what you please with your time. You can accumulate a ton of unique experiences. The dream life.
While these could be the rewards of implementing an effective trading strategy, the Forex lifestyle is more than just riches but forming a routine that will help you become successful.
To help you on your way, we have therefore put together this guide with some important pros and cons about day trading. Here, we’ll dig deeper into the main advantages and disadvantages of day trading. By the end of the article, you should be able to answer whether day trading is the right choice for you.
What Is Day Trading?
Day trading is one of the most popular trading styles used by traders around the world. Day trading involves opening a trade or multiple trades during a day and closing them by the end of the current trading day. As a result, traders can immediately measure their trading performance by the end of the day, unlike in swing trading or position trading where trades are held for days or weeks.
In addition, day trading offers a fast-paced trading environment where traders don’t have to wait for a long period of time to find and open a trade. While this trading style isn’t as fast and aggressive as scalping, it’s still a sweet spot for many traders who want to get some action in the markets.
Pros of Day Trading
Trading Strategies
Day trading allows you to use a variety of trading strategies across all major markets. Popular day trading strategies include breakout trading, trend-following, and counter-trend trading.
In breakout trading, traders try to catch the initial volatility that occurs immediately after the price breaks an important technical level, such as chart patterns.
Trend-following strategies, as their name suggests, involve opening day trades in the direction of the underlying intra-day trend. Trend-following is perhaps the most popular trading strategy among day traders as it returns an attractive risk-to-reward ratio with a relatively high success rate.
Counter-trend trading strategies involve opening trades in the opposite direction of the underlying trend. Counter-trend traders aim to catch market corrections that occur after a prolonged and strong uptrend or downtrend. This trading strategy is slightly riskier than breakout trading and trend-following and should be used only by experienced day traders.
Lots Of Trading Opportunities
Since day trading is a relatively fast-paced trading style, it offers a large number of trading opportunities – every day.
Day traders base their decisions mostly on intraday timeframes, such as the 15-min, 30-min, 1-hour, and 4-hour ones. Those timeframes offer much more tradeable setups than the daily or weekly charts used by swing traders and position traders, which is a major advantage of day trading.
A higher number of trading opportunities doesn’t necessarily mean more profits. Always follow your trading plan and only place trades that are fully in-line with your strategy.
Performance Measure
Day trading involves opening and closing trades during the same trading day, which means that you get your daily results relatively fast. Many traders like to know whether they’re in profit or loss on a daily basis, and day trading allows exactly that.
In longer-term trading styles, traders often face periods of negative price-movements, which doesn’t only require a higher trading account to withstand those movements, but also a lot of patience and discipline to stick to their trades even when times become tough. To measure your performance, create and keep a trading journal with all of the trades that you take during a day. Not only will you be able to track your performance, but you can also look for trading patterns that tend to reduce your profits or lead to losses that can be avoided.
Overreaction to News
Markets consist mostly of human traders, and humans tend to overreact to news. That’s why you’ll see large price-movements around certain news, even if those news shows to be relatively unimportant for the markets. As a day trader, you can take advantage of that behaviour and squeeze out additional profits.
The main thing to know when trading the news is that the actual number is not important. It’s the actual number relative to the forecast that matters. If, for example, the US non-farm payrolls come in at 200k but markets forecasted an increase of only 120k, that’s better than expected and will likely have a large impact on the value of the US dollar.
Technical Setups
As a short-term trading style, day trading is largely affected by technical levels. As the trading timeframe becomes longer, the focus shifts from technical levels more towards fundamentals. In the very short-term, market noise tends to lead to price movements. Over the medium-term, mean-reverting becomes increasingly important, and in the long run, changes and trends in fundamentals create trends in the underlying security.
When using technical analysis in day trading, try to combine a number of technical tools and only take a trade once all or the majority of tools confirm a setup. This is also known as a confluence of technical levels.
Cons of Day Trading
Limited Profit Potential
Given the shorter holding periods of trades and shorter timeframes on which day traders base their decisions, day trading has a more limited profit potential compared to swing trading. In addition, traders close their trades by the end of the trading day regardless of their profit. While this practice eliminates overnight risk, it also limits the potential profits of promising trade setups.
Risk of Overleveraging Your Trades
Most markets don’t fluctuate much over the day. As a result, day traders utilise more leverage to squeeze out the most profits and take advantage of those small price movements. While leverage can be very efficient, traders who over-leverage their trades also risk larger losses.
Leverage is a double-edged sword and should be used only according to your trading plan. Make sure to create a strict risk management plan to cap your leverage or risk-per-trade in such a way that eliminates the risk of ruin (i.e. blowing your account.)
Market Noise
The shorter the timeframe you’re trading on the more market noise you have to deal with. Market noise represents erratic and unpredictable price behaviour without any technical reasoning or news that could have led to those movements.
Market noise presents a real problem for short-term traders, and the only way to avoid getting stopped out too early is to widen your stop-loss level. Take a look at the previous volatility in the pair, and try to set your stop-loss above or below recent support and resistance levels, giving the market enough space to perform.
Conclusion: Should You Day Trade the Market?
Let’s admit it, we’ve all started trading with a day trading style, opening and closing multiple positions during the same trading day. Some traders who found that approach to be too fast-paced gradually switched to longer-term styles over time, such as swing trading.
While fundamentals (such as news reports, for example) can have a significant impact when day trading, fundamental analysis becomes proportionally more important as you zoom out to longer timeframes. Most day traders are technicians and sometimes incorporate some news trading around important market reports.
Still, bear in mind that day trading requires discipline, patience, and a good understanding of the markets in order to return positive results over the long run. If you’re still new to the markets, swing trading could be a better choice to gain trading experience before switching to a faster trading style like day trading.
Swing trading gives you more time to make trading decisions and to get out of a trade if you realize that your analysis is wrong. Therefore, try becoming profitable with a longer-term trading style before switching to shorter-term ones.
Happy Trading
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Risk disclaimer: The information presented on our blog are for educational and entertainment purposes only. Nothing on this website serves as investment advice or recommendations. Trading is risky and you can lose more than your initial investment. MyFxMentor cannot be held responsible for any decisions visitors make. Please consult a financial advisor before making any investment decisions. Risk disclaimer.
