So you are interested in day trading and thinking about joining a trading course but unsure if day trading can make you money. I want to give you insights into what to expect as a day trader and why you should not pay for a course with a trading guru right away. I will share the risks and the psychological factors you need to know before making your first trade.
Day trading can be profitable, but it can also be a gamble for the inexperienced, where you can lose money quickly. People who start day trading with the mindset of getting rich quick scheme usually lose the most. Day trading is so hard because of the unpredictability of the market in the short term.
Even if you trade in successful companies with strong balance sheets, there is no guarantee of success. The market’s extreme volatility in the short term can make technical analysis speculative and vulnerable to making errors and losing money. See 10 common ways to lose money in the stock market.
Most day traders rely only on the technical analysis side, where they use trends and tools such as moving averages to find if the stock is going up or down. The use of analysis tools is quite common to determine the stock trend. The problem with this strategy is that you could buy the stock thinking it will go up, relying on the tools when the stock is overpriced, and going down.
What makes the market volatile?
What makes the market volatile, specifically in the short term, is the massive amounts of money going in and out by big enterprises such as mutual funds and hedge funds. Those people move billions of dollars in and out of the stock that makes the price extremely volatile.
Day traders predict stock movements by looking at trend tools such as MACD. When fund managers move their money out of stock, the price goes down quickly. One of the most significant advantages of small day traders is that they can use the tools to predict the movements of fund managers and move their money out fast to avoid losses.
You can educate yourself more by reading this article on how to know if the stock price will go up or down. If you want to be a day trader, you should learn what day traders use to minimise their risks.
What do you need to know to be a day trader and minimize your risks?
The advantage of small day traders is that they can move their money quickly before the stock price goes down. They use tools to their advantage to see the fund managers’ movements. The secret to day trading: instead of losing money when fund managers get their money in or out, they use those tools to jump in stock when the fund managers start buying and sell when they are selling.
So what are these tools? There are few of them, and almost every trader uses different tools to confirm the stock movements. For example, the image below shows the stock price of Sydney Airport (Top), MACD tool (Middle), and Stochastics (Bottom). In MACD, when the blue line goes below the red line, it indicates selling. For Stochastics, when the black line crosses below the dashed red line, it also indicates selling.
The above is a simplified example and does not show all the aspects of day trading, but it gives you a general idea. Usually, using three tools at once can give you the confidence of where the price is heading. As for learning technical analysis, which day traders use to analyse stock, you can find many information and documents for Fundamental trading, especially if you sign up to a CFD (Contract for difference) broker.
Usually, day traders use leverage to maximise their returns, but it is also a way of losing money fast. Every CFD broker will force you to pay for stop-loss orders and other fees to minimise the losses if the stock price goes below the limit you specified, which usually does.
Recommendations for new day traders are:
- Use at least three tools to track your stock movements.
- You might want to avoid leveraging at the beginning so you can get comfortable with using the tools.
- Use candlestick charts patterns. It’s the best way to see stock prices open, close, highest, and lowest.
- Get comfortable with the idea of spending $1000-$5000 and not getting anything back.
What are the alternatives to day trading?
There is a reason why the most successful stock market investors are long-term traders. Investors such as Warren Buffett, Charlie Munger, and Mohnish Pabrai use proven investment methods to make an average of 20% compound interest over the years. They trade with the mentality of buying a company, not a stock. They review its financials and determine if the company has a moat to defend itself against competitors.
They buy the company for a massive Margin of Safety, which means they pay 50 cents for a dollar. They hold the stock for a very long time (Such as ten years as Mr Buffet prefers). This ensures that the stock price has passed all short-term volatility and gives its correct value. You can learn how to calculate the margin of safety here.
Check the philosophy of the world best successful investor.
If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes
Warren Buffett
The Bottom Line
Therefore, there are many benefits to long-term investing compared to day trading. People are always sceptical of keeping their money in the stock market for the long term. Therefore, only invest the money you do not need for the next five years. Do not invest money that you need to pay your bills or your car loans. The returns in the long term are far more beneficial than the short term.
If you still want to go for day trading, make sure you start small and avoid investing massive amounts at the start. Moreover, you also have to get your emotions in check because the risks are high, and you could lose money.
To learn more, check the stock market investing guide here.
