Advantages and Disadvantages of Day Trading

When an investor opens and closes his positions within the same day, he can be referred to as day trader. The style and strategy for day trading has major differences compared to that of a long term investment.

A day trader tends to focus less on the fundamentals of a company. The focus is more on technical analysis and the news surrounding the company at that time. A long term investor will focus heavily on fundamentals of the company and then may use technical analysis to confirm a buy or sell decision.

Day trading has its own advantages and disadvantages. In the next few paragraphs we will discuss these advantages and disadvantages.

The biggest advantage of day trading is the amount of wealth it can generate. You are typically relying on daily price movements of stocks, and your investment will focus on the biggest gainers of the day. This does mean your focus is making a big return within the same day. However, this is not a status that can be achieved by majority of day traders.

With the biggest advantage comes the biggest disadvantage. That is the risk of day trading. Relying on the daily movement of a stock requires a good understanding of market sentiment. You do not have sufficient time to watch and study the market, as the price would have moved against you during that period. This increases the risk that your investment may not behave as you have anticipated.

Related to this point is another disadvantage. Being good at day trading is extremely difficult. A long term investor will rely on the short term ups and downs of the market averaging out to a long term gain. This is not the day trading strategy. So consistently calculating the direction of the market or the stocks you invest in each day is an important part of day trading.

Another disadvantage that is associated with day trading is the costs of trading. You would have daily costs of buying and selling shares compared to a long term investor. This means your investment has to work much harder to make a return.

Day trading however offers extreme convenience and flexibility. You are your own boss. The hours you work is determined by you, providing they meet up with the market trading hours. If you have daily commitments such as dropping the kids off at school, picking them up, then day trading can probably accommodate your schedule.

Being your own boss can appeal a lot to some investors. Your day to day work load is not dictated to by a manager, as you are the boss. However along with this comes another big disadvantage. The income stream from day trading is not guaranteed and is likely to be anything but steady. Therefore careful financial planning is essential as you are not guaranteed a pay check at the end of each month.

You are also responsible for procuring the required equipment. This is a disadvantage as the capital requirement for such equipment has to be funded initially. As a minimum, a computer with fast and reliable internet connection is required. Also, to be good at day trading, access to breaking news is required. A day trader can not afford to wait for news stories to breakthrough the standard information channels or the Internet. A Bloomberg terminal is a typical device where you would hear breaking news first.

As you can see day trading provides some of the biggest advantages possible. However, it is a cause for concern that it offers the biggest disadvantages as well. Therefore, before engaging in day trading appropriate financial advice should be taken from a professional adviser.

It should also be noted that your investments can go up as well as down in price. It is also possible that you may get back less than what you invested originally.

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