There are many reasons why a person may want to day trade, among other things. Day traders believe that by buying and selling stocks within the same day, they have a better chance of making substantial money. It’s because they will buy based on momentum and sell once the momentum runs its course.
For example, if a trader sees that a company’s stock price has risen by at least 3 percent over the past five days, they may purchase shares of that stock, hoping it will continue to rise in value moving forward (this is known as ‘momentum investing’).
While there isn’t any hard and fast rule for this type of trading (known as day trading), there are several technical indicators that can be used; for example, a person can look at the relative strength index (RSI) to see if a stock will continue to rise in value past a certain point.
There are several advantages and disadvantages of day trading that must be considered before getting involved in this business venture.
The main advantage is making money by buying low and selling high, so it’s good for the ego. However, when one purchases stocks, they do not own them until they have been sold – so there is always an inherent risk associated with this type of trading. In addition, day traders must pay close attention to their spending habits or else they could quickly lose all of their cash reserves.
A person needs to have a large amount of cash in reserve if they lose their initial investment. Another thing to remember is that most people who day trade lose money rather than make it, which is not for everyone.
Even though there are several disadvantages and risks associated with day trading, some believe this type of market activity can be very lucrative if approached correctly: by understanding all the factors related to a particular stock and not simply buying at random (which could result in substantial losses).
Those who engage in successful day trading typically purchase stocks based on the momentum they have observed over the past few days and attributes such as the volatility of particular shares (the amount a stock price fluctuates within a specific timeframe).
Successful day traders also tend to sell once they realize momentum has come to an end or if their stock price has increased by at least 6 percent. To be successful in this business, one needs to keep detailed records of every trade they engage in and why – which must then be presented to the IRS to audit a person’s tax returns.
Strategies and techniques
Day traders use several strategies when engaging in these types of transactions; for example, some believe that holding onto small-cap stocks (companies with lower market capitalizations) is riskier than purchasing large-cap stocks because there is less information about smaller companies’ prospects.
Day traders may also purchase securities during non-peak trading hours (for example, premarket or after hours, learn this here). As mentioned above, many factors must be considered before jumping into this business, including things like cash in reserve and ease of access to the markets.
While it is often thought that successful day traders are geniuses who can create money out of nothing, this isn’t necessarily true because there are so many risks involved. According to one study, over 80 percent of day traders lose money when engaging in these types of transactions; however, those who manage their risk well and keep detailed records have a better chance of making substantial profits.
This type of market activity is not for everyone due to factors such as owning stocks rather than purchasing them (which means they may incur additional costs associated with household goods) and a person’s inherent ability to make quick decisions while minimizing risk exposure. People who engage in short term trading must also keep in mind that this type of activity is taxable income.