Day Trading Profit and risks

Some day traders focus only on price momentum, others on technical patterns. Some traders choose to focus on a limited number of strategies they feel can be profitable.

Some day traders use an intra-day technique known as scalping that usually has the trader holding a position for a few minutes or even seconds.

Most day traders exit positions before the market closes to avoid unmanageable risks—negative price gaps (differences between the previous day’s close and the next day’s open bull price) at the open—overnight price movements against the position held.

Other traders believe they should let the profits run, so it is acceptable to stay with a position after the market closes.
Day traders sometimes borrow money to trade. This is called margin trading. Since margin interests are typically only charged on overnight balances, the trader pays no fees for the margin benefit, though still running the risk of a margin call. The margin interest rate is usually based on the broker’s call.

Profit and risks

Because of the nature of financial leverage and the rapid returns that are possible, day trading results can range from extremely profitable to extremely unprofitable, and high-risk profile traders can generate either huge percentage returns or huge percentage losses. Because of the high profits (and losses) that day trading makes possible, these traders are sometimes portrayed as “bandits” or “gamblers” by other investors.

Nevertheless day trading can be risky, especially if any of the following is present while trading:

• trading a loser’s game/system rather than a game that’s at least winnable,
• trading with poor discipline (ignoring your own day trading strategy, tactics, rules),
• inadequate risk capital with the accompanying excess stress of having to “survive”,
• incompetent money management (i.e. executing trades poorly).

The common use of buying on margin (using borrowed funds) amplifies gains and losses, such that substantial losses or gains can occur in a very short period of time. In addition, brokers usually allow bigger margins for day traders.

In the USA for example, while the overnight margins required to hold a stock position are normally 50% of the stock’s value, many brokers allow pattern day trader accounts to use levels as low as 25% for intraday purchases.
This means a day trader with the legal minimum $25,000 in his or her account can buy $100,000 (4x leverage) worth of stock during the day, as long as half of those positions are exited before the market close. Because of the high risk of margin use, and of other day trading practices, a day trader will often have to exit a losing position very quickly, in order to prevent a greater, unacceptable loss, or even a disastrous loss, much larger than his or her original investment, or even larger than his or her total assets.

Learn now the 9 Day-Trading Techniques you must know!